From the CNN transcript of the debate (emphasis mine):

{Biden} Number two, with regard to bankruptcy now, Gwen, what we should be doing now — and Barack Obama and I support it — we should be allowing bankruptcy courts to be able to re-adjust not just the interest rate you’re paying on your mortgage to be able to stay in your home, but be able to adjust the principal that you owe, the principal that you owe.

That would keep people in their homes, actually help banks by keeping it from going under. But John McCain, as I understand it — I’m not sure of this, but I believe John McCain and the governor don’t support that.

I seemed to have been a little prescient with my [cref so-can-i-get-my-mortgage-renegotiated post] of a few days ago.

But Obama and Biden only want to reward those who can’t or don’t or won’t pay their bills and declare bankruptcy with a readjustment for not only the interest amounts that were contracted for, but also to reduce the amount owed! So if you bought that $300K house and you could only afford a $100K house, Obama and Biden are saying that a bankruptcy judge could arbitrarily reduce the amount the owed on the house to whatever the judge wants.

This will make it harder and harder for Joe Sixpack who pays his bills to get a mortgage. What bank will issue mortgages (secured by the value of the home and land it sits on) if said value can be reduced at any time?

When one receives a mortgage, the bank pays the seller of the home the amount that you contract for when one purchases the home. If that amount is subsequently reduced via judicial fiat, it’s a straight out loss for the bank. If the bank pays $300K to the seller and you’ve paid a little towards the principle (remembering that early in the life of the mortgage one’s payment is split with a majority of the payment going towards interest) and a judge just reduces the principle to, say, $150K, the bank has lost that $150K less the small amount of your payments that have been applied towards the principle.

The bank covers much of its overhead through the interest rates it charges to loan you money. So a reduction in the interest rate also bites into the bank’s bottom line, further reducing incentive to issue mortgages even to people with good credit.

Talk about a financial crisis. That policy would just make it worse.

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