Modifying Mortgage Discrimination in Consumer Bankruptcy

The subprime mortgage crisis that helped bring on the Great Recession resulted in the decimation of housing-related wealth among economically disenfranchised groups and communities. These losses were, in significant part, the direct result of the rampant racialized and geographic mortgage discrimination that took place in these communities in the run-up to the financial crisis and persists today. The Bankruptcy Code, however, offers little relief to these and other distressed homeowners because the Code’s “anti-modification” provision limits a distressed homeowner from modifying the terms of a mortgage on her primary residence. The anti-modification provision is particularly troubling for economically disenfranchised groups and communities because it operates at the intersection of three social and economic factors: (1) the importance of homeownership to wealth acquisition and retention in the economically disenfranchised communities; (2) the persistence of predatory lending relationships that lead to high loan-to-value ratios on mortgages and, in turn, a greater risk of underwater mortgages; and (3) foreclosure externalities that are borne by segregated communities in which compromised wealth is a common attribute. For communities that are already vulnerable to mortgage discrimination, the lack of a bankruptcy modification option compounds the unique risks of cyclical and historical economic disenfranchisement related to homeownership.

This Article contends that by permitting debtors to modify primary residential mortgages, consumer bankruptcy law can address persistent and intractable mortgage discrimination in historically disenfranchised communities and support wealth-building and retention in the process. Reframed in this way as a tool of economic remediation and improvement, and not just a form of temporary relief for
temporary financial misfortune and crisis, bankruptcy law can address the broader structural forces that produce chronic, racialized, economic subordination, particularly related to homeownership. Accordingly, this Article reconceives consumer bankruptcy as providing not only a “fresh start” but also an appropriate remedy for financially distressed borrowers whose economic hardships are directly related to illegal and discriminatory mortgage lending practices that lead to or exacerbate financial distress.