Blown Mortgage

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President Bush urged Congress to reject a new bill that would allow bankruptcy judges to modify the terms of home loans included in bankruptcy cases.  From the Market Watch story on the bankruptcy bill to change mortgage terms:

President Bush urged Congress to reject a Senate bill that would change bankruptcy laws by allowing judges to modify the terms of a mortgage as part of the restructuring of a debt. Instead, Bush said at a White House press conference, lawmakers should approve reforms to mortgage-buyers Fannie Mae and Freddie Mac and the Federal Housing Administration.

The president has a point here.  While the government clearly isn’t done bailing out folks this change seems extremely dangerous to the stability of the secondary market.  If investors are worried that judges are modifying loans pell mell they are going to be extremely reluctant to purchase securities made up of individual mortgages.  Investor interest has to be protected in this process.  Remember - they are the ones with the money!  The government sure doesn’t have it, consumers sure don’t have it - it’s the investors.

If the investors take their money off the table, or, more likely, put greater costs associated with borrowing it, it hurts everyone.  We need investor confidence to return money to the system.  The secondary market only works when investors have confidence in it.  Letting judges make changes as they see fit is a quick way to send investors running.

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