Lenders and Lawmakers Discuss Modifying Mortgages in Bankruptcy

[Jan 8, 2009.]

 

Citigroup is one of several lenders meeting with lawmakers to discuss legislation that would allow judges to modify the terms of residential mortgages for consumers that wind up in bankruptcy, the Wall Street Journal said, citing people involved in the talks.

Traditionally, lenders have been in strong opposition to such legislation. They have argued that these "cramdowns", when a judge can force a principal reduction, would lead to higher borrowing costs for all other homeowners.

Sen. Dick Durbin (D., Ill.) introduced legistation in the House and Senate on the opening day of the new Congress Tuesday.

"The question that faces us now is this: After committing over one trillion dollars in taxpayer money to address the financial crisis, why don't we take a step that would indisputably reduce foreclosures and that would cost taxpayers nothing?" Sen. Durbin said in a statement introducing the legislation.

Hundreds of banks have received assistance from the government recently as part of various bailout and stimulus efforts as the credit markets have frozen. The House and Senate is going to put increased pressure on some of the larger banks to, in turn, help homeowners.

Those consumers that have had difficulty refinancing or obtaining a loan modification from their lender may find some relief through bankruptcy proceedings if legislation is successfully passed.

While the thought of bankruptcy to save one's home may seem like a severe price to pay, it would be an option that is unavailable to most right now who are unable to refinance their mortgage or receive a loan modification.

At the current time, bankruptcy judges are unable to modify the terms of residential mortgages secured by someone's primary residence. They can, however, provide assistance to borrowers that have second mortgages or mortgages on vacation homes or investment properties.

Proposed legislation may be included as part of a larger economic stimulus package or be passed separately.

 

About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.