Law & Society

The airline industry is once again making the news with several carriers increasingly showing risk of bankruptcy, even after major reorganizations under Chapter 11 bankruptcy earlier in the decade. The looming issues, which have already caused labor cuts, are due to worsen as consumer demand continues to drop, the price of jet fuel skyrockets in the US economy increasingly moves towards a deep recession.

Bankruptcy cases filed in 2008 were nearing the 1 million mark. This clearly shows the financial stress being felt across the US and the dire need for relief and government intervention. Recent efforts by Democrats to pass a bill that would adjust existing mortgage loan amounts to more accurately reflect the current fair market value were rejected by Republicans and the banking sector due to projected losses base would have to take, leaving homeowners still waiting for a resolution to their ever increasing mortgage rates.

The mortgage crisis is one of the major reasons for the current state of the economy and to some extent in the number of people filing bankruptcy this year. Subprime loan products, being the most likely cause of the crisis, were marketed aggressively during the real estate boom of the first half of the decade, these loans, which started with low teaser rates, have adjusted to unmanageable levels for borrowers who could only qualify for such products during that time.

John McCain supports bankruptcy and mortgage reform. As part of his revamped economic plan, McCain has proposed a government purchase of troubled mortgages to stem the tide of foreclosures by re-amortizing the loans at fair market value. While McCain should be commended for recognizing the collapsing housing market as the major source of our faltering economy, his plan to keep the middle class in homes and out of personal bankruptcy, will not work.

The problem is that home mortgages are pooled together by the thousands into a special tax free trust. Wall Street sells shares of these mortgage backed securities, known as certificates, to investors, which makes the government purchase of the underlying securitized mortgages impossible. The best Uncle Sam can do to buy these worthless certificates, which will only serves to bail out investors without helping homeowners.

Currently, commercial properties, vacation homes, and investment properties as well as furniture, cars, computers and other assets can have the principle amount of the loan reduced to the value of the property, the interest rate lowered to market rate and the loan re-amortized. This is what is called a “cram down” except there is one problem. You can't do it for the mortgage on your home. It's a hold over from 30 years ago, when mortgages have large down payments and fixed interest rates. Because the loans were simple and conservative, they were shielded from having to take a hit when homeowners had to file for bankruptcy. Well, the interest-only, adjustable-rate, zero down payment mortgages from a few years ago, are anything but simple or conservative. There is no need for this exception in this current market. If something isn't done quickly Chapter 7 bankruptcies will continue to increase over the next few years.