Former Treasury secretary Timothy Geithner recently penned a memoir entitled, “Stress Test,” focusing largely on the U.S. financial crisis and why he and his colleagues made the decisions they did.
Some of the financial wounds of those decisions have been lasting, particularly for homeowners. The book is also raising fresh questions about why the government didn’t do more to help homeowners who were drowning in debt.
Miami foreclosure defense lawyers know that homeowners were the ones who bore the greatest burden during the recession, despite the fact that their blame in the situation was primarily incidental. While the banks have been able to successfully paint a picture of borrower greed, the reality is that banks were not only approving loans that were so obviously and egregiously risky, they were pushing them – hard.
While Geithner attempts to explain the mortgage relief efforts in his pages, his words are, as New York Times’ Columnist Joe Nocera said, “half-hearted.”
Another recent book, written by Vermont Law School associated professor Jennifer Taub, called “Other People’s Houses,” questions why Geithner and others didn’t pursue the very reasonable approach by Illinois Sen. Dick Durbin. That proposal called for a change in bankruptcy code that would have granted homeowners the ability to receive home loan modifications in the course of a bankruptcy.
The 1993 U.S. Supreme Court decision of Nobelman v. American Savings Bank has made it all but impossible for underwater homeowners to seek relief in a bankruptcy court. The ruling strengthened the “favorable treatment” that was granted to mortgage lenders when federal lawmakers reworked the bankruptcy code in the late 1970s. What Durbin’s proposal would have set aside that favorable treatment, thereby evening the playing field.
In doing so, borrowers would have received a “powerful bargaining chip” to use against the banks. Without it, homeowners who are deeply underwater, owing far more on the mortgage than it’s worth, often face an uphill battle in trying to fight off foreclosure. The threat of a bankruptcy filing would force the mortgage servicer’s hand, making them far more likely to negotiate a workable payment plan. If they didn’t, a bankruptcy judge could order one.
This would have also had the effect of making lenders inherently more careful in the loans they chose to underwrite. Also, in some places where this was allowed, between 1978 and 1993, economists have found the impact on interest rates to be miniscule.
So why didn’t the government do this? One of the biggest opponents to it was none other than Geithner. In his book, he indicates that he didn’t find it to be “particularly wise or effective,” though he fails to fully explain the reasoning.
Nocera questions why the government feared a “moral hazard” applicable to helping out struggling homeowners, but not banks. That’s a question Geithner failed to answer.
If you’re battling foreclosure in Miami or the surrounding areas contact Jacobs Keeley for a confidential appointment to discuss your rights. Call (305) 358-7991. Also, don’t miss Miami Foreclosure Attorney Bruce Jacobs on 880AM/the Biz, every Wednesday from 5 p.m. to 6 p.m. on “Debt Warriors with Bruce Jacobs,” discussing foreclosure topics that matter to YOU.
Bankrupt Housing Policy, May 19, 2014, By Joe Nocera, The New York Times
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