A recent study by two academics, Adam Levitin of Georgetown Law School and Joshua Goodman of Columbia University, suggests that the MBA's figures on interest rates inflated the threat.
The researchers found there was virtually no difference in rates quoted by a sample of leading mortgage lenders for single-family houses and vacation homes and multifamily dwellings -- even though mortgages on the latter two can be modified in bankruptcy.
The only consistent discrepancy they found was between the rates charged on single-family homes and investment properties. But investment properties, Levitin notes, contain other risks, including the greater likelihood that investors will walk away from properties whose values fall below their loan balances, that would explain the difference.
Levitin says the findings show that there's no reason to think mortgage lenders would take the threat of bankruptcy into consideration when setting loan terms for primary residences. Lawmakers have also modified their proposal so that it would apply only to sub-prime and other risky mortgages issued from Jan. 1, 2000, to the date of enactment -- further limiting its effect on the overall market.
"I don't know how much more narrowly you can draw the provision," said Alan M. White, a bankruptcy specialist at Valparaiso University School of Law. "It's really aimed at people who want to pay their mortgages."
Francis Creighton of the MBA contends that even a limited change in bankruptcy law now would open the door to further modifications, undermining lenders' confidence in the reliability of their loans and driving up rates to compensate.
That argument became one of the key talking points for opponents to the proposal.
"This will put up barriers -- maybe unintended barriers, but real barriers, the experts tell us -- to the American dream of owning a home," Sen. Charles E. Grassley (R-Iowa) said this month during Senate debate on a housing stimulus package.
Mark S. Scarberry, a bankruptcy expert at Pepperdine Law School, said, "To allow a mortgage holder to force modification on a lender is a whole new wrinkle."
Scarberry says the costs for lenders might be moderated if the proposals required the modified mortgage to be revalued after five years, and written up to a higher market price if the home has appreciated in that period. That way, he said, "the lender would have some upside."
