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Rebuttal to Professor Schwartz NY Times Op Ed on Mortgage Modifications

Posted on Feb 27, 2009 in Uncategorized

Yale Professor Alan Schwartz doesn’t like the idea of mortgage modifications in bankruptcy. It doesn’t sound to me as though he knows much about mortgages or bankruptcy.

Here’s my rebuttal.  I hope that the Times publishes it.  If they don’t you can see it here.

Professor Schwartz’ view from Yale in opposition to allowing bankruptcy judges to modify residential mortgages in chapter 13 reflects a severe disconnect with conditions on the ground.

Bankruptcy judges enthusiastically support this proposal. They have no fear of their courts being swamped. The judges have considerable experience in consumer cases. Bankruptcy judges encourage streamlined and efficient hearings. Moreover, in bankruptcy, most business and negotiations occur outside of court. When stakeholders know the rules of the road, they come to resolution promptly, whether on the negotiation of a big chapter 11 plan or the modification of car loans in chapter 13 cases – something bankruptcy judges have been doing for years.

The professor’s hyperbolic fear of millions of new mortgage cases in bankruptcy fails to recognize that mortgage modifications in bankruptcy court would only be available to homeowners. They would have to be able to afford a chapter 13 plan for five years. Lenders would share in any appreciation for five years.

People who could not afford a sustainable mortgage will continue to lose their homes to foreclosure. But people who can sustain their mortgages in chapter 13 will set a floor from which the residential market will build. Who is more motivated to “buy” a home in foreclosure than the person already living in it? Foreclosure sales lead to further depression of the real estate market not to mention further depression of the values of the homes in the surrounding neighborhood.

Most disturbing is Professor Schwartz’ rather arrogant thought that business cases are entitled to greater priority in the bankruptcy court than those of consumers. Well over 90% of all bankruptcy cases are filed by consumers. Business bankruptcy may get a lot of news but consumer bankruptcy is what bankruptcy judges and most bankruptcy lawyers deal with day in and day out, especially in places other than New York and Wilmington.

The professor’s suggestion that debtors’ attorneys would be outmatched at a valuation hearing by creditors’ attorneys is insulting to the thousands of competent and capable attorneys who represent debtors day in and day out. Under the Bankruptcy Abuse Prevention Consumer Protection Act, these attorneys literally must vouch for the accuracy of data in their clients’ papers. They become quite familiar with property values in the areas they serve. A residential appraisal costs about $300. Dueling appraisals will be introduced and the judge will decide. It’s not hard.

And the professor doesn’t stop at belittling debtors’ attorneys. He also goes on to insult bankruptcy judges – saying that they are not experts in valuation. Dear professor, that’s their job. They’ve been doing it for years. The Bankruptcy Code requires valuation of property to determine the amount of a secured claim and has for a very long time.

What the professor fears and what the banks and other lenders fear is that they might actually have to deal with borrowers in foreclosure rather than putting them in limbo in voice mail hell while their foreclosure team inexorably moves forward to put them in the street.

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