Just say no to a foreclosure moratorium

A foreclosure moratorium effectively abrogates the contract between the borrower and the lender—sticking the investor with a larger loss and preventing the housing market from fixing itself. Investors aren’t the only ones harmed by this vicious cycle—average homeowners also suffer. A ballooning foreclosure backlog prevents the market from clearing, thus dragging all home prices down further…

So what’s the answer to this mess? Bankruptcy reform. A special chapter of bankruptcy should be created to fix the mortgage crisis and hasten a housing recovery, while protecting borrowers and investors alike. Regulators would identify an affordable total debt-to-income ratio for overburdened borrowers. Qualified individuals could then file for this special bankruptcy by presenting all their debts—mortgages, credit-card bills, car loans, and the like—to a court (or an arbitrator). No debts would be excluded, so the borrower’s entire balance sheet could be addressed.

The court would then rank those debts so that a borrower’s debt would be reduced or eliminated in order of seniority. If the court and the borrower could not settle on a sustainable payment plan, then foreclosure and liquidation proceedings could commence.