The soaring number of people losing their homes remains a major cause of the nation's recession.

The magnitude of the foreclosure crisis is hard to overstate. Nationally, about 4.6 million people -- one in 10 homeowners -- are in the foreclosure process or delinquent in their payments. A record number are filing for bankruptcy. Across the nation, foreclosed properties are dragging down housing values and depressing the economy. Arizona has one of the country's highest foreclosure rates.

Voluntary efforts by mortgage servicers to reduce the flood of foreclosures have been woefully ineffective. These efforts have been complicated by the securitizing of mortgages, making negotiated modifications extremely difficult.

What's needed is a way to modify home loans that is fair to both homeowners and mortgage holders. Ideally, these adjustments would be worked out without creating a new bureaucracy and new costs for taxpayers.

Is such a solution possible?

Yes, and it's easily within reach.

Federal law already allows bankruptcy courts to revise the terms of almost any loan, included mortgages on second homes. But the mortgage on a primary residence -- loans at the heart of this economic crisis -- cannot be revised under current bankruptcy law. That must change.

Congress should amend the U.S. Bankruptcy Code to permit bankruptcy courts to adjust primary home mortgages. Judges would then have authority to reduce principal to bring it in line with a home's current market value, reduce the loan's interest rate, extend the loan's term, or make any combination of those three changes.

While the American Bankers Association opposes this change, it's actually a win-win solution:

In bankruptcy court modifications, mortgage holders will receive lower payments. But that's more money than they will get if the house is foreclosed and sits unsold for months or even years. The principal of the adjusted loan would often be equal to the value of the home -- exactly what the mortgage holder would receive in foreclosure.

If we stem the tide of foreclosures in Arizona and across the country, the housing market will stabilize more quickly and help turn around the economy for everyone.

Last week, I joined Attorneys General from 21 other states in a letter to the leaders of Congress urging them to pass a pending bill that will amend the bankruptcy law, a move also supported by President-elect Obama. I was pleased to see that Citigroup, one of the nation's largest lenders, has dropped its longstanding opposition to this change in the law. 

This simple amendment offers multiple benefits. It requires no taxpayer funding, creates no new government bureaucracy, lets a bankruptcy judge distinguish between insolvent homeowners and speculators, forces mortgage holders to accept the loan adjustments within a constitutional structure and provides immediate economic relief.

Homeowners won't get a free ride from bankruptcy courts. Bankruptcy subjects them to stringent, court-supervised budgets for several years. 

The new law will also give mortgage holders greater incentive to modify terms with struggling homeowners before they file for bankruptcy. Most consumers will welcome offers that let them avoid bankruptcy while staying in their homes.

By amending the bankruptcy law, Congress can take a large step toward economic recovery. This change is inexpensive and gives responsibility for the problem to the participants, not to taxpayers. No less importantly, it's the fastest way to halt our current financial free-fall.

A copy of my letter to Congress can be viewed by clicking here.

Terry Goddard