The head of a U.S. financial bailout watchdog panel said bankruptcy
judges must be allowed to reduce home mortgage debt or the Obama
administration's housing rescue efforts could fail in the areas where
they are most needed.
Elizabeth Warren, who chairs the Congressional Oversight Panel for
the Troubled Asset Relief Program, told the Reuters Global Financial
Regulation Summit in Washington on Monday that her biggest concern
about the housing plan was the failure to deal with underwater
The Obama administration's refinancing aid so far will not help much
in hard-hit housing markets where home prices have fallen 30 to 50
percent below their mortgage principal, she said. So-called cramdown
changes to bankruptcy laws or other legal devices were needed to cut
mortgage debt to underlying home values.
It would be the one way to deal with principal that exceeds the
value of the loan, she said. Without that, we risk a foreclosure
mitigation plan that is helpful in the areas of modest need, but not
helpful where the problems are acute.
Warren, a Harvard Law School professor, said the inability to write
down home mortgage debt was an exception to most bankruptcy law, which
allows judges to reduce other forms of debt.
If this were business property, a chapter 11, or a corporate
chapter 7 proceeding, there would be no restriction to write down the
secured debt to the value of the collateral, she said. The law
recognizes everywhere the importance, in a financial crisis, of
recognizing losses, taking the hit and moving on, she said.
She said she could only attribute the existence of the exception to
the political clout of the mortgage banking industry. If the cramdown
proposals fail in Congress, It means that the banks are still calling
Reducing mortgage principal, via bankruptcy court or otherwise,
would reach a more economically rational solution to the problem of
underwater mortgages by minimizing investor losses and maximizing the
repayment ability on the loan.