With bank seizures of foreclosed homes at record levels, the Obama administration continues to treat bankruptcy court as the proverbial elephant in the room. As this New York Times editorial observes, the administration’s Pollyanna-ish belief in the willingness of banks to voluntarily modify principal balances for homeowners facing foreclosure has led to a standoff between primary and secondary mortgage holders:

Investors, including pension funds and mutual funds, often hold the first mortgages. Banks often hold home-equity loans and other second mortgages. Investors reasonably believe that second liens should be reduced before the primary mortgage is modified, but banks balk at that because it would prompt write-offs they don’t want.

Fortunately, investors are getting tired of this foot-dragging:

Some investors, notably the powerhouse group BlackRock, have called for a special bankruptcy process to resolve the standoff. The court would seek to reduce bankrupt borrowers’ total debt to affordable levels, starting with unsecured debt like credit cards, then undersecured debt, like second mortgages, and then, if necessary, the primary mortgage debt.

Giving bankruptcy judges permission to modify the terms of mortgage loans–isn’t that what we’ve been saying for years? Maybe this time the message will get through to Congress and the administration.