08 Mar Bankruptcy Courts And The Mortgage Crisis: A Good Start
The Mortgage Crisis is in the beginning stages. Based upon all the articles and studies that I have been reading, we are about 15% to 25% into this disaster. So far, the only solutions being offered by the Bush Administration have been negotiation strategies. Obviously, these ploys have not worked, as the number of foreclosures continues to rise. The mortgage companies feeble attempts at fairness proved to be a complete waste of time. My clients in Southwest Florida tell me that it is almost impossible to get someone on the phone, and then when they do, they are told to submit paperwork and play the waiting game. Their stories are all the same, and they all end the same way, foreclosure begins prior to the modifications being considered.
Why? Because the foxes were left in charge of the hen house, because the mortgage companies are going broke themselves and they are scrounging to get every last dollar they can out of each and every homeowner. The problem is that the homeowners are now tapped out. There is no money left to give. If the banks take voluntary write-downs of hundreds of billions of dollars, the markets would go crazy. According to the Mortgage Bankers Association and the American Bankers Association, any bill which allows homeowners to modify their mortgages in bankruptcy would be a disaster and mortgage interest rates would jump significantly. The only problem with this argument is that there is no evidence to support it. There was a study performed which came to the exact opposite conclusion. The Study suggested that if interest rates rise, the rise would be insignificant.
What is the Solution?
One solution would be for Congress to modify the Bankruptcy Code and allow the Bankruptcy Courts to modify residential mortgages on debtor’s homesteads. Currently, Bankruptcy Courts are not allowed, by Statute, to modify or cram-down the value of a homestead. If Congress changed this law, Debtor’s would not break down the doors to the bankruptcy courts. There are several good arguments in support of allowing the Bankruptcy Courts to modify homestead mortgages.
First: The mortgage crisis can be simplified by putting homeowners into three (3) categories. 1) Those who can afford to pay, will get no relief. 2) Those who cannot afford to keep their homes will be foreclosed upon, and 3) those homeowners who can pay for the value of their homes, but cannot pay under the current terms and conditions of the notes, will be the ones who are eligible for relief. Experts estimate this third category contains between 1 million and 1.5 million homeowners. Accordingly, there are not enough homeowners eligible for the relief allowed under the bills in Congress to overburden the Bankruptcy Courts.
Second: The Bankruptcy Courts are already in a superior position to handle these types of issues. Bankruptcy Courts and Judges routinely cram-down cars, personal property, and sometimes vacation homes. An entire body of law exists to deal with the issues that are currently bogging down the mortgage companies.
Third: The procedure would be handled in a neutral forum before an impartial Bankruptcy Judge who will base his or her decision on the evidence presented. A judge who has no allegiance to the Debtor or the Creditor. Both parties will have a level playing field to hash out the issues. It become obvious very quickly why the creditors do not want this type of level playing field.
The legislation currently pending in Congress will need to be given a new look as the number of foreclosures continues to rise. The Bankruptcy Courts cannot save every home and every homeowner, and I am not arguing that it can. But, they may be able to save a few. In Southwest Florida, that little difference can go a very long way.
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