Bankruptcy Bill Trying to Go to the Root of the Foreclosure Problem

Posted on March 9, 2009
Filed Under Mortgage | 2 Comments

The bankruptcy bill that will be taken up by the House will try to go to the root of the foreclosure problem. By it the homeowners who are cowering under the weight of mortgage dues will get their monthly commitments lowered according to court order. This clause of the Obama plan is stirring up a hornet’s nest of trouble.

The legislation is not independent but part of a wider housing scheme being introduced for voting by the House. It is a stick that is accompanying many carrots that the mortgage industry is being offered by the new government to enable people to continue to stay in their houses.

The broader housing plan will cost the government $75 billion. Among the many features is the offering of cash incentives to the mortgage servicers who would be expected to reach new agreements with borrowers to make it more affordable for them.

The banking group has been intensely lobbying against the bankruptcy measure and had nearly managed to kill it. It showed up cracks also within the Democrats. The liberal minded regarded it to be the only way to really assist the debt-ridden homeowners to escape the clutches of foreclosure. The moderates wanted more voluntary efforts to be initiated before going to the courts.

The divisions were visible in the Senate also. The latter will mull over its own rendering of the legislation during the forthcoming weeks.

The net result was that the banking industry managed to get many concessions from the House Democrats. The measure would apply to only the current loans for those borrowers who had sought modification of loan from their lenders prior to the filing of bankruptcy. Also only those will qualify who can no longer continue with their mortgages.

Democrats were compelled to postpone action on the plan when the moderates expressed their concerns that the bill was still loaded favourably towards one side. A compromise would require the finding out if the banks had been given the chance to offer reasonable loan terms before the judge resorted to rewriting the mortgage. The onus would have to be on the borrowers to prove that they had made the overtures to try to get the mortgage modified before filing bankruptcy. The judge would have to see if the loan workout was consistent with the plans of the government. The expectation was that the mortgage repayment per months would be not more than a third of the income of the borrower.

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