How to give struggling homeowners a break

Mortgage lenders don't want bankruptcy judges to have the power to rework contracts. But what if the federal government is the lender?

Published September 23, 2008 3:06PM (EDT)

To limit the damage done to the U.S. economy by an accelerating wave of foreclosures, Democrats want to give bankruptcy judges the power to redo mortgage contracts -- thus preventing new defaults and keeping homeowners in their homes. One obstacle to achieving this -- outside of the adamant resistance of the banking and securities industries -- is the quite basic problem of figuring out who actually owns a given mortgage.

Mortgages have been pooled together, repackaged, sliced and diced and sold all over the globe to a dizzying array of entities. What's a bankruptcy judge to do?

Last night, Stephen Pearlstein, the Washington Post business columnist, dropped a fascinating tidbit into this mix at the very end of a quite good discussion of the current crisis on the Charlie Rose show. He said that if the government buys mortgage-backed securities from the financial institutions that currently own them, per the Paulson plan, then the government will have the power to rework those mortgages as it pleases -- in effect, it would be the other party to the contract in a bankruptcy court action. Voila -- problem solved.

Well -- maybe. If the government buys a bunch of battered mortgage-backed securities and then reworks the underlying mortgages, the value of those securities, one would assume, would drop even further. Not great for taxpayers, as the goal of the bailout plan is for the government to eventually sell these securities back on the open market.

So far as I can tell this morning, I haven't seen this point picked up anywhere else. As I write these words, Ben Bernanke and Hank Paulson are getting grilled by the Senate Banking Committee. We'll see if anyone brings it up.

By Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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