The financial markets stand to benefit the most when the housing market recovers. The House of Representatives passed a new bankruptcy provision that will allow bankruptcy judges the ability to modify the mortgage terms of a bankruptcy petitioner’s primary home loan to avoid foreclosure. This provision would serve as a last option tool for homeowners that could not achieve a loan modification through negotiation with the financial institution holding the mortgage loan. A similar bill has to pass the US Senate before an already supportive President Obama can sign this act into law. This new bankruptcy reform will assist in bolstering consumer confidence, if for no other reason than a basic necessity of human existence, shelter, is no longer threatened. Consumer confidence statistics are directly linked to the health and sheer existence and success of business and credit markets, thus translating to banks going back to business as usual and a strengthening economy.
So why are the banks standing in the way of a provision that will aid the very homeowning taxpayers that are bailing the banks out of the consequences they created within the housing market? The bill is a corrective measure for the current housing environment and has a suggested life span of 2015. The banks lobbyist have built there opposition of this new bankruptcy law around fear. Fear that the consumer will suffer higher interest rates and tougher loan qualification standards. However, the real fear lies with the banks, as the bankruptcy judges would be enabled to reduce the principal (loan balance) to reflect the current market values. Banks fear this power would cause them to suffer additional losses, although the overinflated market values of two years ago were knowingly caused by the banks. Currently, the bankruptcy judges can rewrite mortgage terms on investment properties for bankruptcy petitioners, and investment property loan interest rates are no more than a point higher than primary home interest rates and the loan guidelines a bit more stringent….but when homeowners are unable to refinance because of negative equity, missed payments, a tough employment market and are still recovering from credit abuse, maybe higher rates and tougher guideline can be withstood until 2015 for the sake of homelessness prevention. Seems like the banks are still serving the American public cold french fries in their self-preservative efforts. However, the sooner Americans become financially literate the sooner a weaning of our needs on banks will be realized.