Published by Mark

Bankruptcy Mortgage Loan Modification – Pros And Cons

April 9, 2009 at 6:07 am

Working as a bankruptcy attorney in Indiana for coming up on twenty-five years, I’ve been involved in more than my share of discussions about mortgages. Up to this point, though, mortgages have been in a debt category all their own.

In the course of helping clients through the process of filing bankruptcy, I’m dealing with unsecured debt such as credit card bills and medical bills. I deal with auto loans, and even some tax debts and student loan debt. In selecting the form of bankruptcy to file, we need to discuss whether avoiding foreclosure is a primary goal. Sometimes I even assist clients in negotiating with their mortgage lenders. But, until now, bankruptcy judges have had no authority to deal with the mortgage on a debtor’s primary residence.

The proposed new bankruptcy law could change all of that. For the past year, I’ve been keeping close tabs on the mortgage modification proposal that passed in the U.S. House of Representatives and is scheduled for a vote in the Senate. If this proposal becomes a law, bankruptcy judges would be given new powers to modify mortgages.

According to the Washington Post, forces on both sides continue to debate the terms of modification, with financial institutions, mortgage bankers, AARP, unions, and consumer advocate groups all stating opinions on the pros and cons of this proposed new bankruptcy law.

Arguments FOR the bill:

1. It would greatly reduce the number of foreclosures by helping millions of Americans stay in their homes.

2. It would stabilize the housing markets and stop home values from falling further.

3. The bill offers assistance to homeowners who were making good faith efforts to stay current on their payments, but who were hit with layoffs or heavy medical bills.

4. There is no cost to taxpayers to implement this bill.

Arguments AGAINST the bill:

1. This isn’t fair to the majority of homeowners who have kept up with their mortgages.

2. The bill isn’t fair to investors who bought mortgage-backed securities.

3. The bill isn’t fair to lenders who lent money in good faith in the expectation of getting paid back.

4. Lenders will be less willing to take risk and mortgage interest rates will rise for all borrowers.

5. It will be an administrative “nightmare” to track home sales occurring within five years of a mortgage “cramdown” so that sale proceeds can be shared with the lender.

The debate rages on. As Jessica Holzer of the Wall Street Journal puts it, “This legislation would amount to the most aggressive step yet by the federal government to help strapped homeowners avoid foreclosure.”

Here are MY general comments on the matter:

I’m always emphasizing in these blogs that bankruptcy is not a one-time event, but a process. It’s obvious the same is true for this new bankruptcy law.

The goal of bankruptcy law in general has been to provide a safety net for folks who have fallen upon hard times, often through no fault of their own, and to help them rebuild their financial lives. In the process, the law tries to treat all parties, including lenders, investors, and debtors, as fairly as possible. The law isn’t perfect now, and the new law won’t be either. After all, it’s a work in process!

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