Congresscritters uphold rule of law... for now

It's a given that no matter what comes out of the housing-crash legislation in Washington, it'll be a botch.  And no one will be happy with it.  Liberals will complain it doesn't help the little people.  Conservatives will complain it doesn't help the big shots enough.  And free marketeers will be appalled at the whole spectacle.  But at least one aspect of the bill appears to be dead and buried… and a good thing, too.

…language that would allow bankruptcy
judges to modify the terms of some home mortgages — perhaps the most
controversial part of the Senate bill — is likely to be omitted from
the Dodd-Shelby substitute amendment. Democrats could offer it as an
amendment later in the debate.

That provision, which
appears to be all but dead as originally conceived, would allow
bankruptcy court judges to change the terms of mortgages on primary
residences, including reducing the outstanding principal.

This scheme isn't just a matter of lending a helping hand to homeowners.  (There's a misnomer, since they don't own any of their homes if they're upside-down on their mortgages.)   It's a matter of the rule of law.  It's a matter of people who sign a contract needing to know that the terms of the contract won't suddenly be changed by a third party.

are likely to offer narrower bankruptcy language circulated when the
Senate first considered the bill. This proposal would limit the new
power for bankruptcy judges to cover only existing non-traditional and
subprime loans.

The lending industry argues that allowing
judges to reconsider the terms of home loans could end up raising
interest rates for borrowers in general, as banks would raise rates to
offset the risk that a loan could be changed in the future.

That's putting it mildly.   You want to talk about the credit markets seizing up?  Just wait till lenders hesitate to write mortgages because they never know when a judge might step in and arbitrarily change the terms of a mortgage contract.

But Charles E. Schumer
, D-N.Y., chairman of the Joint Economic Committee, said the more
limited bankruptcy language should alleviate those concerns, because it
would not allow any changes to future loans.

Minority Whip Jon Kyl , R-Ariz., predicted that the final bill passed by the Senate would not include the bankruptcy provision.

Say for argument's sake that a judge can change a contract, but only retroactively.  The same problem applies, because lenders will fear the passage of a new law down the road that would retroactively change the contracts they're thinking about writing up.

Oh well.  On this score anyway, the early signs appear promising. 

The Daily Reckoning