On Morning Edition, NPR discussed the proposal to allow bankruptcy judges to change the terms of mortgages during a bankruptcy proceeding in the same way that they can change the terms of car loans, credit card loans and other debt. The report noted the assertions of the mortgage industry that this could raise the cost of mortgages and then told listeners that this would be bad for the housing industry. While the possibility of bankruptcy renegotiation would undoubtedly raise costs, which presumably would be passed on to borrowers, the impact would almost certainly be very small (especially if the change was temporary, as many have proposed). Only a small fraction of mortgages go into bankruptcy and lenders already take large losses on most of these mortgages, since they typically end up in foreclosure. In normal times, it is unlikely that even 1 percent of mortgages would end up in bankruptcy. If the average difference in the loss on these mortgages is 5 percent (a very large average difference, since in many cases there would be no change), then the change in the cost would be 0.05 percent. An increase of this magnitude would have little impact on the housing market. Mortgage rates often fluctuate by far larger amounts in the course of a single day. It would have been appropriate for NPR to give listeners an idea of the size of the potential increase in mortgage interest rates. Otherwise they have no way to assess the potential impact of the policy.
--Dean Baker
