- The Washington Times - Tuesday, February 26, 2008

ANALYSIS/OPINION:

When a prize fighter has no punch left and has lost his will to press on, his manager throws in the towel. It’s a simple way to end the match — quick and easy.

Consumer groups and some U.S. policymakers advocate their own version of “throwing in the towel” for distressed homeowners — declaring bankruptcy. A quick and easy solution? That’s right; bankruptcy — an expensive, invasive and devastating process — is peddled as a quick-fix to the foreclosure crisis.

The major problem for the advocates is that right now in America primary mortgage debt is excluded from bankruptcy protection.

Why? Because public policymakers decided homeownership is a good thing and maintaining the free flow of inexpensive mortgage credit to consumers is an important part of making homeownership possible. In fact, Congress has twice, wisely, rejected the strip-down of mortgages for principal residences via bankruptcy proceedings as too threatening to mortgage interest rates. Now Congress, however, is mulling legislation that would change the bankruptcy code that has protected homeowners for more than a century.

Sure, filing for bankruptcy sounds like the perfect quick-fix for getting distressed homeowners out of foreclosure. But in reality, bankruptcy is painful with tremendous personal consequences that bring far more harm to homeowners than good.

Plain and simple — bankruptcy puts a 10-year mark on a homeowner’s credit record.

Sure the family home may be saved if judges are allowed to unilaterally cram down mortgages, but what good is that if one can’t acquire credit down the road? Credit required for securing credit cards, automobiles, loans or even future homes. Even many employers require credit checks as part of their hiring process.

And let’s not forget that bankruptcy involves many court costs and attorney fees. It’s not a free, or even inexpensive, process.

In fact, the biggest beneficiaries of the estimated 600,000 bankruptcies that will result if this legislation is passed are the trial lawyers. At an average of $3,000 in attorney fees for bankruptcy representation, they stand to gain $1.8 billion at the expense of homeowners who are at the end of their rope.

Not only are the effects damaging to distressed homeowners, but future home buyers and those looking to refinance their mortgages will be adversely affected if the current law is changed. To offset the inevitable risk that will come from a bankruptcy judge stripping down the debt on a home as part of a bankruptcy proceeding, lenders will undoubtedly tighten lending standards, raise interest rates and require larger down payments.

The Mortgage Bankers Association believes lenders will raise interest rates by 1½ points to offset this risk. In the current economy, the last thing Americans need is increased mortgage costs.

Make no mistake: Millions of homeowners need relief fast, but a perceived quick-fix with severe, unintended long-term consequences benefits no one.

The proposed bankruptcy legislation is neither a consumer-friendly remedy nor is it a practical and fiscally responsible approach to solving the nation’s housing woes.

HOPE NOW and other industry-led responses to easing the housing crisis will work — they just won’t work overnight. Consumer advocates, policymakers and others can do the most to help these efforts by getting the word out to borrowers in distress that they should contact their lenders directly or through the HOPE NOW hotline at 1-888-995-HOPE. Overreacting with legislation that will harm consumers will not solve the foreclosure problem any faster; and the lasting effects will be much more damaging to the economy.

Congress should not allow America’s homeowners to throw in the towel via bankruptcy.

David G. Kittle is chairman-elect of the Mortgage Bankers Association.


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