Tuesday, January 13, 2009

Bankruptcy To Include Mortgages? Possibly In The Future

The current system has HELOCs pitted against VISAs. And VISA is winning. With our current bankruptcy system, mortgage and equity lines can not be modified by judges. For those who are financially in trouble - whether due to being underwater or having the ever-increasing ARMS - often foreclosure becomes the only option. Can't sell the property. Can't refinance the property. Banks often won't negotiate until payments are late, then with all of the added on penalties and fees the hole becomes too big for the homeowner to dig themselves out of.

While New Jersey just started a mortgage mediation/modification process most states have nothing of the sort. Many on the verge of bankruptcy may just as well say goodbye to their homes. With the avalanche of foreclosures lenders are already being pitted against lenders. The credit card companies know that will see something if bankruptcy comes. Those that own the mortgage just get to keep the depreciating properties - properties that may have trouble selling, or sell at a price much less than a renegotiated loan may have.

These are probably some of the reasons we are seeing pressure for bankruptcy reform that includes mortgages modifications. In an article from Bloomberg, and printed in the Silicon Valley Mercury News, titled Mortgage bankruptcy reform may speed losses the potential changes are discussed. Lets take a look -

A change in bankruptcy laws to allow judges to reduce the mortgages of consumers would probably boost filings, accelerating lenders' losses on home-equity, automobile and credit-card loans, according to Keefe, Bruyette & Woods.

Bankruptcy reform legislation has "increased momentum," the analysts wrote, after Citigroup Inc. endorsed a Democratic proposal last week that would give judges the ability to adjust the principal, interest rates and terms on mortgages during bankruptcy proceedings.

The deal has yet to win support from the rest of the banking industry, which joined Republicans last year to help kill a similar idea aimed at slowing foreclosures.

The provisions would force some lenders to take losses without a say in bankruptcy court proceedings. Home equity loans will be the "first to come under pressure," the analysts wrote, and banks and other companies holding mortgage bonds without government backing may also see higher losses.

The effect on financial-services companies of the bankruptcy law change would vary and even those firms harmed may benefit in some ways, the Keefe, Bruyette analysts wrote. Credit-card companies, for example, may find some troubled borrowers are better able to repay their debt as judges rework home loans to a more affordable level, the analysts wrote.

With the housing market turning to a turning from a discussion from falling prices to the new worry about overshoots - housing prices falling too much too fast that are even below the lowest projected value - the support appears to be rising. Neighborhoods decimated by foreclosures and turning into worthless ghost towns. Mortgage companies once in the business of lending money to buy houses now the owner of more and more decreasing and unwanted properties.

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