11 Feb Now is the Time for Judicial Modification of Mortgages in Bankruptcy!
Over 46,000 foreclosures are filed per week in the United States. Per week! In my own state of North Carolina, it is estimated that over 1,000 foreclosures per week will be filed for 2009! Credit Suisse estimates that 8.1 million mortgages will be in foreclosure over the next four years!
With the housing sector responsible for one in eight jobs in the United States, more foreclosures will lead to more unemployment and additional contraction of consumer spending and a further drag on the economy. The foreclosure crisis is affecting the tax base of local governments meaning that taxes may increase and services decrease. The increase in housing inventory is clogging the market making selling your home difficult. The situation is dire indeed.
Many experts including Ben Bernanke of the Federal Reserve Board agree that until the housing crisis is stemmed, the economy will continue to struggle. Since the mortgage foreclosure crisis exploded in 2007, a number of consumer and housing advocates, civil rights groups, and economists have stated that judicial modification of mortgages in chapter 13 bankruptcy cases is an effective approach to stemming the foreclosure crisis. A recent report from Credit Suisse estimates that this step alone will reduce foreclosures by 20%.
But the lending industry opposes this step. The lending industry created the problem in the first place and still refuses to recognize the losses that caused the industry to need such massive bailouts. The lending industry keeps pushing voluntary loan modifications but in data from Valparaiso University School of Law, less than 10% of the voluntary modifications result in reduced principal and more than half capitalize the unpaid interest onto the loan balance.
Furthermore, only a third of the modifications reduce the monthly payment while almost half (45%) see their monthly payments increase! If the homeowner was struggling before the modification, he is less likely to make the payments now.
It was thought that the voluntary loan modification programs would provide relief for homeowners. For example, the Hope For Homeowners Act passed last spring was expected to help more than 400,000 homeowners through FHA refinancing if the servicer would accept less than 100% payment guaranteed by the government.
Since October and the program’s inception, 312 people have applied for the program. Additionally, the Hope Now effort has not achieved any real results and studies demonstrate that 7 out of 10 homeowners who are seriously delinquent on their mortgages are not in any loss mitigation stages.
From my own experience, neither I nor my colleagues achieve significant and meaningful loan modifications from servicers that will really keep people in their homes. Voluntary efforts promoted by the lending industry have proven to be ineffectual. Yet, more and more money is demanded of Congress in bailouts.
There is an alternative! Legislation is pending before Congress that would allow bankruptcy judges to modify home loans down to the fair market value of the property; change the interest rates; and extend the payment period up to forty years (less the time elapsed under the mortgage) which would mean that more people are able to stay in their homes. And the cost to the taxpayers: $0.00.
This point bears repeating: the cost to the taxpayers is nothing! And such step will go a long way toward stabilizing the housing markets.
The “Helping Families Save Their Home In Bankruptcy Act of 2009” (H.R. 200/S.61) has broad support from diverse groups such as Citigroup, AARP, National Association of Home Builders, 22 state attorney generals, U.S. Conference of Mayors, and many other groups as well as distinguished economists at Princeton, Yale, and Moody’s Economy.
But “Helping Families Save Their Home in Bankruptcy Act of 2009” (H.R.200/S.61) needs to move now in order to be effective. There is urgency here because even a week’s delay means that 46,000 more families are facing the prospect of losing their homes!
Adrian Lapas, Esq.
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