One proposal that would make the banking industry “chew brick” and eat the excess debt they created by offering subprime mortgages is to allow homeowners to “cram down” the amount they owe to just the current value of their homes.

If the bankruptcy law was amended to allow courts to alter the terms of a mortgage, up to 600,000 homes that would be lost to foreclosure in the next 18 months could be saved. And, it wouldn’t cost taxpayers a dime (unlike the large bailouts being offered to homebuilders in Senate legislation to avert economic damage.)

This remedy would redirect the pain from the homeowners who are feeling it now, back to the lenders who aggressively marketed subprime loans to moderate income and especially to minority borrowers.

Among the anti-consumer provisions of the 2005 Bankruptcy deform was to take away judicial discretion to modify loans even when the collateral wasn’t worth what you contracted to pay for it. When Hurricane Katrina struck just after the new law was passed, lawmakers considered making the law more amenable to its victims. But the only exception to the harsh new means test eliminating bankruptcy relief for most people, was given to disabled veterans “performing homeland defense activities.”

Several bills have been introduced since the predatory lending crisis became undeniable. But on April 9th, the Senate blocked legislation that would have allowed underwater homeowners to reset their loans in bankruptcy court.

A rational observer would think banks would agree to renegotiate mortgage terms for borrowers facing financial difficulty. Banks don’t want to become landlords and have to bear the cost of keeping properties habitable. In foreclosing against a house, mortgage holders lose 50% to 60% of the loan value, including the fees they have to pay to lawyers and mortgage servicers. But are banks voluntarily renegotiating “under water” mortgages? No. All of the hortatory coming from the Fed falls on hard hearts on Wall Street. Banks all have “work out” departments that say they want to avoid foreclosure and bankruptcy, yet only 3.5% of homeowners were able to extend their repayment periods or work out a deal, in the first eight months of 2007.

The profitability of the financial “product” of securitized and bundled subprime mortgages, proved irresistible to investors, who also proved resistant to the inevitable crash.

As Alan Greenspan told Newsweek “The big demand was not so much on the part of the borrowers as it was on the part of the suppliers who were giving loans which really most people couldn’t afford. We created something which was unsustainable. If it weren’t for securitization, the subprime loan market would have been very significantly less than it is in size.”

The Center for Responsible Lending advocates legislation that would give relief to holders of subprime or non-traditional mortgages (like “no documentation or low documentation” products) who lack the financial ability to meet their payments and who would otherwise lose their homes.

The wonderful thing about the proposal is that as soon as it became law, banks would immediately become more reasonable in working out repayment plans – outside of court.

The People’s Lawyer is a project of the Nat’l Lawyers Guild, NYC Chapter. Contact the chapter at www.nlgnyc.org or at (212) 679-6018.