Bankruptcy Law Being Modified

By admin • February 26th, 2009
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This new bankruptcy law measure could give bankruptcy judges more power to modify primary home mortgages. Congress is poised to give bankruptcy judges more power to modify primary home mortgages in an attempt to halt the foreclosure crisis, a move Democrats and housing advocates have been pushing for two years in the face of stiff opposition from Republicans and the mortgage industry. The House of Representatives is expected to pass the legislation soon. The measure would temporarily remove an oddity in bankruptcy law: Judges can reduce or cram down the principle on a vacation home, car, or boat, but they cannot do it to a mortgage for a primary residence. As it is now, bankruptcy often results in higher mortgage payments on a primary residence because skipped payments and other fees are tacked on to the principle, for which homeowners are responsible under their repayment plans Backers hope the change in the law would be a strong incentive to banks and other mortgage holders to extend loan modifications. They don’t believe it would send borrowers rushing into court seeking to reorganize their debts under Chapter 13, an unpleasant and arduous task that stains a credit report for at least seven years.

They also have the support of President Barack Obama. “We thought bankruptcy was needed as a way to say to the industry, ‘If you don’t do it, somebody’s going to do it for you,’ ” said Kathleen Day, a spokeswoman for the Center for Responsible Lending, a non-partisan group that targets what it calls abusive lending practices.

A provision in the legislation would force people to seek a voluntary modification of their mortgage before going to bankruptcy court. And the change would apply only to mortgages in place when the legislation is signed into law, not future ones. But the mortgage industry, with a few exceptions, opposes the bill. Companies argue that allowing bankruptcy judges to modify mortgages for primary residences ultimately would hurt consumers because lenders would have to raise loan costs to compensate for the increased risk that some principle might be forgiven. “That’s exactly what we need, the cost of financing homes to go up, in the economy we have right now,” said David G. Kittle, chairman of the Mortgage Bankers Association, noting that the risk of bankruptcy court revisions is what makes the interest rates on second-home mortgages and even credit cards higher than primary residence mortgages. But opposition is faltering as foreclosures continue to drive the dramatic drop in home prices. Troubles in the housing market existing-home sales dropped in January to the lowest level since mid-1997 have helped to fuel the deep recession, and economists said that reducing principal balances for bad credit mortgages is a key to recovery.

Congressional Democratic leaders tried last year to change the bankruptcy provision but were unable to overcome strong Republican opposition in the Senate and the threat of a veto from former President George W. Bush. But more Democrats are now in the Senate, and Obama is in the Oval Office. “My administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce the balances on home loans on primary residences to their fair market value, as long as borrowers pay their debts under a court-ordered plan,” Obama said this month in unveiling his plan to reduce home foreclosures.”I just want everybody to understand, that’s the rule for investors who own two, three and four homes,” he said. “So it should be the rule for folks who just own one home as an alternative to foreclosure.”

The legislation would limit the new bankruptcy rules to existing mortgage loans. Homeowners would have to seek a voluntary mortgage modification from their mortgage holder at least 15 days before filing for bankruptcy. And the bill would require the homeowner to share the profits from a home sale with the mortgage lender if it takes place within four years of the bankruptcy. Read the full article online.

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