StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between

Mortgage Modification in Bankruptcy or Not?

15 Apr 2009
Posted by Pete Davis

Tense negotiations on allowing bankruptcy judges to modify home mortgages are underway in the Senate.  The outcome will determine whether hundreds of thousands of homeowners can keep their homes.

President Obama supports allowing home mortgages to be modified in bankruptcy, as do most, but not all, Democrats.  Most Republicans and mortgage bankers oppose it.  The arguments pit political necessity, reducing an estimated 8 million foreclosures by up to 800,000, against economic reality, mortgage rates will go up for everyone to pay for mortgage bankruptcy relief for those few.

On March 5, the House passed H.R.1106 by 234-191.  Seven Republicans supported the measure, and 24 Democrats opposed it.

How quickly the Senate takes this up remains to be seen.  Senate Majority Whip Dick Durbin (D-IL) and the lone Republican supporter, Arlen Specter (R-PA), are in negotiations over what to put before the Senate.  Durbin wants to maintain as much of the House bill as he can, but needs to get at least one or two Republicans to reach the 60 votes needed to pass it.  Specter supports allowing bankruptcy judges to modify the interest rate of a first mortgage, but not the principal.  Senator Claire McCaskill (D-MO) has expressed misgivings and voted to table Durbin's bill last year, and Senator Tom Carper (D-DE) wants to limit the bill to just subprime mortgages.

A potential deal was reported today by The National Journal Congress Daily. It would only allow a first mortgage to be rewritten in bankruptcy if a bank failed to offer terms as generous as those in President Obama's Making Home Affordable program or President Bush's Hope for Homeowners program.  At risk, low-income borrowers and those with mortgage payments of less than 31% of income would also be excluded.  Only mortgages of less than $729,750 originated before this year would qualify.

If the Senate takes up the bill, it may be amended to restrict it further as the only way to get some relief into law.  The mortgage bankers have convinced enough members of Congress that the collective good in keeping lower mortgage rates for everyone outweighs saving more than a few hundred thousand homeowners facing foreclosure.

I'm unclear on how mortgages

I'm unclear on how mortgages are being treated vis a vis other debt in bankruptcy. Bankruptcy allows for all sorts of debt to be discharged when a debtor declares bankruptcy.

My questions are:

Are mortgages currently treated differently?

If so, why?

Mortgage modification

My understanding is that a mortgage is a non-recourse loan, meaning if you can't pay you don't have to( you can't keep the home but you don't have to make the payments ). Unlike other loans which you sign a personal guarantee which commits you to pay, if you don't the lender has recourse to other assets of yours to satisfy the debt..

Mortgage Modification

Dave has it right.  Mortgages are secured by the home, but they are non-recourse, so a creditor can't go after your other assets if you don't pay.  Normally, the home is worth more than the mortgage, so it provides creditors enough security.  However, over the past year or two, we've tested that assumption, and many homes are now worth less than their mortgages.  Bankruptcy judges are precluded from altering mortages on primary residences, although they can modify them on second homes.  Why?  Because that's the way we've always done it.  Mortgages on homes were not common practice for most homeowners until after World War II, so it wasn't really an issue.  Since then, we haven't really had much outcry for mortgages on primary residences to be written off.

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