Projo Biz Blog

U.S. Senator Sheldon Whitehouse is urging the Bush administration to allow bankruptcy courts to modify mortgage terms for homeowners facing bankruptcy.

"The financial recovery plan passed by Congress and signed into law on Oct. 3, while critical to address the stability of our financial markets, was clearly only a beginning," Whitehouse wrote in a letter today to the leaders of the Treasury, Federal Reserve, and Federal Deposit Insurance Corporation (FDIC). "...The administration's initial plan to have the mortgage industry voluntarily rework mortgages to prop up the housing market has clearly not worked - and won't.''

Whitehouse said that a "more straightforward" way to stem the tide of foreclosure is to allow bankruptcy courts to modify mortgages on peoples' homes as they do with other types of contracts, including mortgages on second and third homes.

"It strikes me as absurd that a bankruptcy judge can modify the terms of a mortgage on a ski chalet or beach bungalow,'' Whitehouse wrote, "but not on a principal residence..."

In Rhode Island, nearly 1,600 foreclosures were filed during the third quarter of this year, up 33 percent from last year.

Whitehouse called the proposed changes to the bankruptcy code introduced by Sen. Richard J. Durbin, D-Illinois, are "straightforward, commonsense reform that would assist homeowners at no cost to taxpayers."

Whitehouse expressed concern at reports that the government is considering spending as much as $40 million to offer banks a financial incentive to adjust troubled mortgages. "The taxpayers have already paid to shore up our banking system," Whitehouse wrote. "Must every way to address the foreclosure problem involve paying the banks with taxpayer dollars?"

The letter is addressed to Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben Bernanke, and FDIC Chairman Sheila C. Bair.

Whitehouse is a co-sponsor of the Durbin bill, "Helping Families Save Their Homes in Bankruptcy Act of 2007" (S. 2136), which would address this loophole in the Bankruptcy Code and allow principal residence mortgages to be adjusted in bankruptcy proceedings.

The non-partisan Congressional Budget Office has estimated that the bill would have no cost to taxpayers and would help keep 638,000 Americans stay in their homes.

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