That is the implication of the assertion, cited on NPR, that legislation that would allow bankruptcy judges to adjust the terms of mortgages would lead to a sharp jump in interest rates. All the legislation being proposed is time-limited and would only apply to mortgages that were issued during the bubble years. While this could lead to larger losses for banks on these mortgages, this legislation cannot affect the cost to banks of future mortgages. Therefore, if the bankers' claim is true and mortgage interest rates do rise sharply in the future, then the implication would be that their profits would be much higher in the future. News reporters should note this fact.
--Dean Baker
