Dangerous lending practices and loose underwriting in the subprime mortgage market have put 2.2 million families in danger of losing their homes to foreclosure.[1]  These families are trapped in "exploding" adjustable-rate mortgages (ARMs) that are due to increase to unaffordable interest rates.  In fact, hundreds of thousands of families face rate increases at the same time that their houses are worth less than the balance on their mortgage. 

Very few of these homeowners will be able to sell or refinance.  Loan servicers who could modify loans to make them more affordable aren't doing so:  A recent report by Moody's found that loan servicers had only modified 1% of mortgages that increased to higher rates in January, April and July of this year.[2]  Unless Congress takes action, these families lose homeownership, surrounding neighborhoods lose property value, and the entire economy suffers.

Current law excludes home owners from relief available to boat owners.
Today homeowners are denied equal access to bankruptcy protections.  People who own investment properties, vacation homes and boats are allowed to get loan modifications as part of debt relief, but the law specifically excludes homeowners from similar protections.

A bankruptcy solution is effective, easy to do, and costs the Treasury nothing.
We urgently need legislation that would allow lenders and loan servicers to modify mortgages to allow families to continue paying on their loans and keep their home.  This would provide judges the authority to modify harmful mortgages marketed by subprime lenders in recent years, and would help more than 600,000 financially-troubled families keep their homes.[3]'a

The specific fix.
The essential solution lies in simply removing the law's language that denies relief to homeowners.  Delete the phrase in section 1322 of the bankruptcy law that excludes, alone, the mortgage on a borrower's principal residence from the chapter 13 section providing bankruptcy judges the authority to modify secured debts.  Add several modest additional conforming changes. 

Tweaking Bankruptcy – The Benefits

  • No cost to the US Treasury.
  • Narrowly targets families who would otherwise lose their homes.
  • Saves American families not facing foreclosure $72.5 billion in wealth by avoiding 600,000 foreclosures by their neighbors.[4]
  • No negative effect on home credit.  When bankruptcy laws permitted loan modifications on a family's primary residence between 1978 and 1993, there was no evidence of market impact.  Similarly, loan modifications permitted from 1978 through the present for loans secured by family farms, commercial real estate, investment properties and vacation homes have produced no negative effects. All these types of secured debt, plus credit card receivables and car loans, are readily securitizable, notwithstanding the ability of judges to modify loans in Chapter 13.
  • This solution is better for lenders.  Guarantees lenders at least the value they would obtain through foreclosure, since a foreclosure sale can only recover the market value of the home.  In addition, saves lenders the high cost and significant delays of foreclosures.

Consumers can have a voice in the matter.

[1] Center for Responsible Lending, "Losing Ground: Foreclosures in the Subprime Market and Their Cost to Homeowners," December 2006, http://www.responsiblelending.org/pdfs/foreclosure-paper-report-2-17.pdf.
[2]Michael P. Drucker and William Fricke, "Moody's Subprime Mortgage Servicer Survey on Loan Modifications," Moody's Investors Service (September 21, 2007).
[3] Calculations by the CRL using data from its "Losing Ground" report cited above, research from the University of North Carolina, the Home Mortgage Disclosure Act, and Bloomberg research.
[4] Families lose 1.14% of their own house's value for every foreclosure that occurs on their block. Woodstock Institute, "There Goes the Neighborhood: The Effect of Single-Family Mortgage Foreclosures on Property Values," June 2005, http://www.woodstockinst.org/content/view/104/47/.  Median house value of $212,000 * 1.14% * 50 houses/block = $121,000 cost/foreclosure * 600,000 avoided = $72.5 billion saved.  http://www.realtor.org/Research.nsf/files/MSAPRICESF.pdf/$FILE/MSAPRICESF.pdf

Relevant Links:

Loan Servicers Are Not Modifying Loands to Keep Borrowers in Home

Loan Modifications Do Not Hurt Mortgage Market

Straightening Out the Morgage Mess: How Can We Protect Home Ownership and Provide Relief to Consumers in Financial Distress - Part 1

Straightening Out the Morgage Mess: How Can We Protect Home Ownership and Provide Relief to Consumers in Financial Distress - Part 2