There is a proposal on the table that would allow bankruptcy judges to modify loans. You read it right ….

This proposal was actually taken out of the Housing and Economic Recovery Act (HERA) passed in the summer 2008, BUT this particular provision was a deal-breaker for President Bush.

Take note, though, with the election results of November 4th, our focus must immediately change. And what do we now discover?

A ha .. This proviso is listed as one of the four (4) main tenets of President-elect Obama’s housing plan.

So what’s wrong with it? Well, here’s the take from the Mortgage Bankers Association (MBA):

Granting judges this power would throw into question the value of the collateral that backs every mortgage made in this country—the home. In response, investors—to offset the risk of a judge unilaterally modifying the loan—would require an additional risk premium and thus lenders will be forced to charge higher rates, require higher down payments and charge higher costs at closing. All these costs would be borne by the borrower.

The mortgage bankers claim that mortgage rates would increase by at least one and a half points. But proponents argue that bankruptcy judges already have the ability to modify the terms of other debt, including car loans, to help individuals who file for bankruptcy protection from creditors get back on their feet.

So why not provide this protection for homeowners? The proposal would make the new law only apply to loans made before its enactment. In a January 2008 report from the Congressional Budget Office entitled Options for Responding to Short-Term Economic Weakness (obviously it wasn’t clear that long-term economic weakness was ahead), researchers write:

Allowing bankruptcy judges to modify the terms of mortgage loans would give distressed homeowners another avenue for shedding burdensome debt. It might also give mortgage lenders a greater incentive to restructure debts outside of the bankruptcy court system. From one perspective, furthermore, it would eliminate a current preference for mortgage debt relative to other types of debt among lenders and thereby possibly help avoid future excesses in the mortgage markets. It could, however, add to the caseload of the bankruptcy court system, causing delays in resolving cases.

President-elect Obama is for the proposal, and with a majority in both houses of Congress, it is more than likely that this will happen. A look into the future, for sure ….

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Posted in Bankruptcy, Cresession, Residential Real Estate, Attorneys, Bankers | One Comment