Robb: Bankruptcy changes will have unintended consequences
by Robert Robb on Feb. 23, 2009, under Edge, Opinion
President Obama gestures while speaking at Dobson High School in Mesa on Wednesday regarding the housing foreclosure problem.
From the political notebook:
• President Obama and congressional Democrats seem intent on permitting bankruptcy judges to modify mortgages on primary residences. They can probably garner enough Republican support to get it through.
There has never been a case, however, in which the unintended consequences have been clearer in advance.
The Democratic pitch is basically this: bankruptcy judges can modify other credit agreements, including for second homes and other luxury goods purchased by the rich. Why not for the only home of average Jacks and Jills?
Primary residences are treated differently in bankruptcies in a number of ways. Other creditors cannot go after your home; as long as you remain current, you get to keep it. Your home mortgage lender cannot go after your other assets for payment.
The Democratic narrative is also misleading about what goes on in bankruptcies regarding luxury goods, such as second homes. Bankruptcy petitioners don’t get to keep them and just pay less for them. They are disposed of to partially pay the claims of creditors.
Current bankruptcy laws do provide some leeway on primary residences. A Chapter 13 filing stays any foreclosure, and the homeowner is given three to five years to make up any arrears.
In an ordinary market, in which home values are rising, home lending is a low-risk business, given existing bankruptcy laws. In the event of default, the lender can get back the home, which is usually worth more than what is owed. No loss.
If lenders, however, have to assume the risk that a bankruptcy judge can impose a loss, they will charge for that additional risk.
This will be reflected partly in higher mortgage rates. The Mortgage Bankers Association projects that mortgage rates would increase 1.5 percentage points.
The larger impact will be much tighter underwriting: much larger down payments, sharper limits on payment-to-income ratios, and rigorous verification of income.
Now, the result might be good for the economy. Lax mortgage underwriting is a proximate cause of the current economic difficulties. Putting lenders at greater risk might be beneficial.
But the result will be that buying a home will be more difficult and take more time. Fewer people will be able to buy homes. Those who can buy will pay more for less.
The consequences will fall particularly on young people, who will probably have to remain renters longer.
This isn’t what Democrats intend. But it is what will happen.
• In a mostly bleak world, there are some hopeful signs regarding governance in Muslim countries.
One of the sources of global tension is the lack of secular, democratic governance and pluralism in Muslim countries. Islam has not been reconciled to the separation of mosque and state.
Such reconciliation did not come easily nor peacefully in the Christian world.
The assumption of many has been that the introduction of democracy in Muslim countries would lead to the rise of Islamist parties and theocratic rule. That risk remains large.
However, there are some counter-indications. In the first elections in Iraq, voting was along sectarian lines and mostly for religiously-oriented parties. In the recent provincial elections, voter sentiment shifted to secularists promising good governance.
Voter sentiment seems to have similarly shifted in Indonesia, where Islamist parties are polling at about half the support they received in the 2004 election, and currently at below 10 percent.
The most hopeful development is occurring in Turkey, where a democratically-elected, Islamist party has ruled for six years.
The only religiously-oriented moves it has made have been in favor of things we would regard as exercising the right of religious expression, such as permitting women to wear head scarves in government buildings. It has instituted more free-market and liberal reforms than its ardently secularist predecessors.
What’s happening in Iraq, Indonesia and Turkey may be the beginning of something extraordinarily important.
Robert Robb, an Arizona Republic columnist, writes about public policy and politics in Arizona. E-mail: robert.robb@arizonarepublic.com
