Bankruptcy Code Needs Tools to Fix Mortgage Mess

26 Sep Bankruptcy Code Needs Tools to Fix Mortgage Mess

I got a real thrill when a judge before whom I practice testified to a Congressional committee about California families losing homes to foreclosure. Judge Morgan told lawmakers that it pained her that there was not an effective tool to help these families in the Bankruptcy Code as it exists.

Congress is considering a bill which would allow the modification of home loan mortgages in bankruptcy, something currently prohibited. Originally, the prohibition on modification was supposed to have encouraged home loans. [It must have worked, given the lending frenzy of the past several years!]

In a world of declining home prices, allowing homeowners to strip their home loans down to the current value of the property would give the lenders a fair approximation of what they bargained for: the right to take the house by foreclosure if the borrower didn’t pay. Allowing the borrower to keep the house and pay what the house is worth today gives the lender the financial equivalent of its bargain, and the homeowner keeps his home.

It may be easier for the lending industry to have bankruptcy judges in effect operate as their loss mitigation department than it is to conduct foreclosure sales and end up owning lots and lots of empty houses. That’s not good for any of us.

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Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.
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