Tuesday, October 23, 2007

Proposed Bankruptcy Law Changes

Congress is currently considering two bills, one in the Senate and one in the House, designed to alter the bankruptcy code to help homeowners who find themselves in the mortgage crunch. I have read both versions of the bill and think that the House version probably goes the furthest toward fixing some of the problem.

The basic problem hasn't been that the failing mortgages are "sub-prime." The problem has been that the mortgage industry has consistently made loans in excess of the value of the property. This has been litigated time and again, but it never seems to make the press. The mortgage brokers work with appraisers to get the property valued so that the loan can close. That value may be far in excess of the fair market value of the property. When it is it becomes impossible for the debtor to sell the property in the event the payment becomes too much. The debtor simply can't sell the property for enough to obtain a release of the loan.

What the House bill does is permit a bankruptcy court to cram down the mortgage to the value of the property. This would result in two things - first, the debtor could possibly then sell the property and pay off the mortgage - second, the debtor could perhaps obtain financing on the realistic value and remain in the property.

Now, this probably doesn't go far enough, but it's a start. I don't think it goes far enough because it requires a bankruptcy filing in order to cram down the amount of the loan. Congress should pass a law making it possible to cram down the loan outside of the bankruptcy process. If you ask our congress people they will tell you that the threat of bankruptcy will make the mortgage lender more willing to work with the debtor, pre-bankruptcy, but I don't see that happening. When someone is struggling to pay the debt load on a property, or is behind, it becomes an adversarial process fairly quickly. If a debtor is unable, or unwilling, to file bankruptcy he would have no better bargaining position under the proposed law than he has under the old law.

Still, it is a step in the right direction. Please write your congressman and ask for support for this bill. The bill numbers for each version are - House : HR3609IH Senate: S2136IS


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