June 25, 2018

Are Mortgage Modifications in Bankruptcy a Good Idea – Part Two

Earlier this month, I wrote a post on this blog setting out the question of whether Congress should enact legislation empowering bankruptcy judges to modify the terms of mortgages within a Chapter 13 bankruptcy.

Several of my colleagues in the Bankruptcy Law Network have argued that adding this power to the authority of bankruptcy judges will help stem the foreclosure crisis we are seeing in many cities and towns and that so called “voluntary” mortgage modification programs created by mortgage lenders has not and will not work.

Bankruptcy Law Network founding member Cathy Moran, who I respect greatly, has created a special advocacy page on her website that you can use to encourage your elected representatives to support mortgage modification in bankruptcy.  At  the same time Cathy notes that the judicial mortgage modification legislation now circulating in Congress leaves many unanswered questions.

North Carolina bankruptcy attorney Adrian Lapas, writing on the Bankruptcy Law Network blog, makes a compelling case in favor of judicial mortgage modification – click on the link to read Adrian’s post.

What, then, are the arguments against judicial mortgage modification.   A thoughtful and well reasoned argument against modification comes from Andrew Grossman of the Heritage Foundation.   Mr. Grossman argues that judicial mortgage modification will impose uncertainty and financial loss on mortgage lenders, thereby increasing the cost of mortgage loans in the open market.   Credit, therefore, would further tighten, causing additional limits on mortgage availability.

My personal political leanings tend to favor the libertarian ideal of less regulated markets and fewer limitations on the “invisible hand” of free market capitalism.   However, as a longtime bankruptcy practitioner, I have seen firsthand some of the abuses and outright greed of mortgage lenders and other creditors who use their position of strength and leverage to the disadvantage of sometimes innocent homeowners and consumers.

Ultimately, however, I think that the consumer wields the ultimate power.  In my experience many, but not all, of the folks who end up filing bankruptcy do so because of poor financial decisions and unwise use of credit.   Consumers who end up on the wrong end of unfavorable contracts are often poor credit risks – because of bad decisions made in previous months and years.   Home ownership does not make sense for everyone and if the only way a consumer can get into a house is though an unfavorable mortgage deal, then that consumer should delay the gratification of home ownership.

If there is a silver lining in the current financial mess we find ourselves in, I hope it will be to re-establish responsible lending behavior – both as to lenders and as to borrowers.   It is true that lenders were reckless when doling out money, but borrowers were all too willing to take on financial obligations that they could not afford.

Perhaps the appropriate answer to the judicial modification question would be to so empower bankruptcy judges for a limited period of time in limited mortgage circumstances.   Such a solution might help “rebalance” loan to value relationships but not create yet another government impediment to the free market.

What do you think?

About Jonathan

Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need personal bankruptcy protection. In practice for over 25 years, Jonathan teaches bankruptcy law and practice at legal continuing education seminars and he is a founding member of the Bankruptcy Law Network. Jonathan lives with his wife and children in Atlanta.

Comments

  1. While I appreciate the concerns raised by opponents of mortgage loan modification on a debtor’s primary residence, those criticisms may ignore that the approach taken so far by Congress has been to spend money throwing it up in the air and hoping it lands in the right place. Mortgage modifications do not cost the tax payers money unlike all these other programs that have been created but failed to solve the problem. As any good consumer bankruptcy attorney will tell you, the mortgage companies’ hands are tied because of securitized trusts that finance the loans. The mortgage companies are forced to all but certain take losses of foreclosure rather than a reasonable modification that allows people to stay in their homes and the mortgage companies to still make some money. Politicians of both parties have failed to listen to the consumer bankruptcy attorneys at least until now.

  2. I am a real-world example of why the cram-down should be allowed through chapter 13.

    I have lived in my home for 10 years, we always paid ontime. Then in 2007 my company started to slow down and when we had other customers go bankrupt on us, we had to close the company and file chapter 7 personally. We were even on welfare for several months.

    We owe about $800K between the first and second and the house up the street just sold for $585K.

    If a judge could help us avoid foreclosure by reducing some of the principle and adjusting the mortgage terms to make it a little easier for us to get back on our feet – it would provide us a little more stability that we have been lacking over the last two years and maybe when things get better we can get back into small business and employ people like we did in the past 7 years.

    Right now, our servicer Chase put us through 7 months of back and forth and a Making Home Affordable trial payment plan only to tell us that we were denied the modification and after several calls they still won’t tell us how exactly we don’t qualify or what numbers and calculation they are using, only “lack of income”. We have three kids 5yrs and younger and it would be awful if we lost the home because with our bad credit it will be difficult even to rent.

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