Congress Is Mulling Over Another Bolder Plan To Tackle Foreclosure Crisis

April 16th, 2009

Congress is mulling over another plan to tackle the foreclosure crisis – the plan being bolder than the previous ones. Last summer Congress had initiated many steps but less than 400 had applied for modification. The idea now is to permit bankruptcy judges more power to enforce modification. Experts feel that this will be effective and show results.

During the past year the issue about bankruptcy had arisen many times but was opposed by the Republicans as well as by the mortgage and banking lobby. But the latter has now has taken a back seat with the loss of sympathy. The new Congress that will be sitting from 6th January 2009 contains less number of Republicans. President-elect Obama supports the plan unlike President Bush.

Overwhelmed by the expenses and responsibilities of foreclosure many in the mortgage world are warming to the idea. Scott Stern of Lenders One (cooperative of independent mortgage brokers) said, “As a matter of general policy it is probably bad. But I think extreme circumstances call for extreme responses.”

Currently the mortgage on a primary house cannot be subjected to modification in the personal bankruptcy proceedings. But it is possible in the case of second house mortgages, apartments as well as on loans taken for yachts and other properties. In the latter instances the judge can enforce forgiveness of part of the debt in a repayment workout. The new bill is being introduced on the very first day of the January session by Senator Dick Durbin (Illinois) and Rep. Brad Miller (North Carolina). It will empower judges to make modifications on the first mortgage also.

The bill will address the problem of the involvement of many parties in the current mortgages. So far it has been impossible to make all these parties agree on any one point. Servicers too are constrained by different investors – investors that are dotted all over the globe. This has often lead to a deadlock while talking about modification or lowering the value of the mortgaged security. An empowered bankruptcy would be able to boldly cut through these knots and enforce a compromise. By modifying mortgages the lenders will benefit financially by avoiding the tortuous route of foreclosure.

But mortgage groups contend that lenders would compensate the loss incurred due to this, by hiking up interest rates and amount of down payment for future mortgages. This will result in fewer mortgage takers and that in turn will affect the real estate market.