Citigroup (C) and some other banks are in talks with Senators about legislation that would change how people in bankruptcy would be treated when it comes to their mortgages. The obvious goal is to allow people to stay put and not push more inventory into the housing market which continues undermining home prices
The plan is too clever for its own good.
According to The Wall Street Journal, "any congressional Democrats and President-elect Barack Obama have supported changing the law, saying banks that have accepted federal aid should be doing more to help homeowners wrestling with debts they can’t pay."
There is a great deal of evidence, some of it from the federal government, that people with mortgages which have been renegotiated continue to default. There is some logic to that. Helping people who are broke does almost nothing. Someone who cannot make a $900 a month house payment is unlikely to be able to handle one at $600. Many of the people in question are out of work or have low paying jobs. Many have considerable consumer debt which makes them like almost every other citizen.
The federal government cannot halt the decline in the housing market by resetting terms for homeowners who won’t benefit from the process.
Until the issues of having too many homes which are worth less than there mortgages and the rising rate of unemployment is addressed, the government is better off buying the homes and letting their current residents stay in them.
Douglas A. McIntyre