Mortgage Modification In Bankruptcy In Not New To Foreclosure DebateWe’re two years deep in the foreclosure crisis and many opponents of mortgage cramdowns in bankruptcy are ardently insistent that allowing mortgage modifications in Chapter 13 bankruptcy will somehow spell the end of consumer lending as we know it.  But allowing cramdowns in bankruptcy is not a solution that is new.  In the 1980’s during the farm foreclosure crisis, legislators saw that mortgage lenders were refusing to grant voluntary mortgage modifications despite government subsidies, so they took action. 

The agricultural lending crisis of the early 1980s had its roots in the agricultural export boom of the 1970s. U.S. agricultural exports rose over 500 percent from 1972 to 1981 (from $8.24 to $43.78 billion), which in turn led to a dramatic rise in commodity prices and farm incomes over the time period. Net farm income peaked at over $27 billion in 1979, a rise of 41 percent over the decade.

The 1980s farming crisis was a typical boom-bust scenario: Demand for farming goods increased sharply during the early 1970s but saw a corresponding decline in the late 1970s and early 1980s. When prices for their goods were rising, farms expanded and farm real estate prices increased significantly.

Sound familiar?  Is so, then you know what happened next.  Farmers went into debt buying more land or taking out loans against their farm’s equity.  Then suddenly the value of those same farms plummeted along with demand for their goods and the prices they could demand for those goods.  Not only that, the demand for farmland also dropped drastically, just as the demand for residential housing has dropped dramatically leaving the real estate market flooded with inventory today.  Many farmers faced foreclosures.  A matter of fact there was a farm foreclosure crisis, not on the exact scale as we see in the residential market today but big enough to be a crisis.  Just like today, our government threw money at the mortgage industry hoping they would do the right thing and help farmers avoid foreclosure.  But of course, they didn’t do that and the farm foreclosure crisis got worse, it got so bad, that Congress moved quickly to enact legislation that created Chapter 12 bankruptcy, which would allow farmers facing foreclosure to modify their mortgages.  We have already been through this type of foreclosure crisis and we already know that mortgage servicers will not act on their own accord, so why are our legislators failing to pass a law that will allow bankruptcy judges to modify residential mortgages?  Maybe they have forgotten who they really represent…the American people.