28 Feb Bankruptcy Can Be A Useful Tool For Mortgage Modification
In a recent paper to appear in the Connecticut Law Review, Alan M. White, an Assistant Professor of theValparaiso University School of Law, analyzes causes of the continued foreclosure crisis and steps that can used to curb it. In the end, he concludes that even though Chapter 13 Bankruptcy represents a substantial cost to Debtors, judicial modification of mortgages in bankruptcy can be a useful tool to develop a standardized approach to debt reduction on principal mortgage balances.
Professor White finds that in the past four years, debt grew faster than the ability to pay it. This trends is continuing as more people lose their jobs or employment hours are cut back. Simply put, income growth has not keep pace with debt payments. OVer 6 million mortgages are delinquent on payments or are in foreclosure and approximately 14 million homes have mortgage balances that exceed the value of the home. 56% of all sub-prime mortgages are delinquent. The level of delinquencies are at a level not seen since the Great Depression of 1929.
A major faIlure of mortgage modifications is that inreality, it actually increases the amount of debt, not decrease it. Most modifications only postpose the payment of the debt by adding to the end of the loan or increase debt by incurring new debt to pay old debt. This is a main function of the Hope Now program and many programs that are available on the state level. Connecticut’s CHFA program uses this mechanism by lending money to pay delinquent payments and speading the arrearage over an extended period of time.
Meanwhile foreclosures continue to increase. With the holiday moratoriums on foreclsoures ending and the winter season ending, incentives to stall off foreclosures are ending. Lenders don’t relish taking a home in the winter months and incurring the cost for heating and preservation in the cold. Current predictions, however, show more than 17,700 foreclosures are expected in Connecticut in 2009.
So far, judicial modification of mortgages in bankruptcy remain one of the only viable methods of reducing mortgage debt thus stopping the vicious cycle of foreclosures and job loss.