J. Thomas Black - Bankruptcy News - Expert: Bankruptcy Changes Could Save Half Million Homes

Bills have been introduced in Congress that would allow Bankruptcy Courts to basically re-finance home mortgages, and for example, changing them from adjustable rate mortgages (ARM's) to fixed rates, and lowering the interest rate.

Needless to say, the financial industry is against the changes, so it is not clear how much of a chance these changes have to become law. The financial industry is claiming that the changes would cause interest rates to increase, and possibly make mortgages harder to get. But there was important testimony on Capitol Hill today, and several experts are weighing in on the side of changing bankruptcy law, to permit the so-called "modification" of home loans, which has been prohibited since at least 1979.

Moody’s chief economist testified today that nearly 500,000 foreclosures could be avoided through the passage of legislation that would allow bankruptcy judges to modify a chapter 13 debtor’s primary mortgage. “Properly designed, the legislation could reduce the number of foreclosures through early 2009 by at least 500,000,” Mark Zandi said in prepared testimony for today’s House Judiciary Subcommittee on Commercial and Administrative Law hearing on H.R. 3609. “Given that the total cost of foreclosure is much greater than that associated with a chapter 13 bankruptcy, there is no reason to believe that the cost of mortgage credit across all mortgage loan products should rise.”

Responding to questions from the committee, Zandi also said that he was in favor of a three-year sunset provision for the legislation in order to re-assess its impact. Richard Levin, vice chair of the National Bankruptcy Conference, also testified that a change to the Bankruptcy Code was needed to match the changes that have taken place in the mortgage marketplace. “Current financial conditions—both the markets that produced this baffling array of loans and the resulting rising tide of foreclosures—demand that the Bankruptcy Code be amended to reflect the extraordinary changes in mortgage finance that have occurred in the past 30 years,” Levin said.

David G. Kittle, Chairman-Elect of the Mortgage Bankers Association, disputed the testimony that passage of H.R. 3609 would not increase costs and reduce the availability of mortgage credit for principal residences. “Lenders, securitizers and loan servicers would have to take various precautions to avoid or offset the significant new risks H.R. 3609 would impose,” Kittle said. “Such precautions would include increasing interest rates and other compensation, tightening credit standards, requiring larger downpayments and restricting credit in declining markets.”