Let’s make a deal

Famously, the new president argued in his inaugural address last week, "The question we ask today is not whether our government is too big or too small, but whether it works."

But to know whether the government is working, we need to know what it was designed to do. Fortunately, the federal government comes with an instruction manual called the Constitution.

That document establishes the federal courts, which, for one thing, are supposed to encourage orderly commerce by assuring lenders they can get help enforcing a contract by going to court.

But now there resurfaces the bad idea that the courts should do just the opposite.

The quickest way to arrest plummeting home values and soaring eviction rates, both President Obama and Democratic House and Senate leaders now contend, is to pass a bill to give bankruptcy judges authority to alter loan terms on primary residences.

Currently, bankruptcy courts have no authority to alter the terms of a home mortgage. The scheme to allow bankruptcy judges to rewrite mortgage terms might allow many Americans to stay in homes on which they can't currently afford to make the payments. Those Americans would presumably welcome such a change.

But what else would it do? First, it would encourage hundreds of thousands -- perhaps millions -- of financially strapped Americans to file for bankruptcy and seek a new deal. Mortgage holders would have to send attorneys to attend each of those proceedings, arguing for some lesser share of what they're owed -- assuming they could even find them all.

Meantime, those homes would remain in the hands of Americans who can't afford them -- and thus almost certainly can't afford to maintain them. Neighborhoods would likely deteriorate. New would-be home buyers "playing by the rules" would not be allowed to buy those homes, which would be prevented from coming on the market.

But perhaps that wouldn't matter, because lenders -- unable to count on the courts to enforce duly signed contracts -- would either halt mortgage lending entirely, or would require jacked-up down payments and interest rates to indemnify themselves against the increased risk of mortgages being mailed back with "You lose, sucker" scrawled across them.

Want to freeze the home sales market for years to come?

Vital to economic recovery is predictability under the rule of law. To unfreeze investment capital, potential investors must be reassured that "the deal" as to their tax liabilities, the enforceability of contracts -- even their assumption that an investment made today will remain legal tomorrow -- won't be changed overnight. (Witness the New York Stock Exchange's recent overnight ban on "shorting" bank stocks, which brokerage houses enforced retroactively.)

Yet, when it comes to the sanctity of a mortgage contract, President Obama and congressional Democrats now propose to sweep any such stability aside, changing the home-loan business into a cross between "Let's Make a Deal" and "The Family Feud."

"And your new monthly home payment will be? Survey says ..."