A large numbers of foreclosures are displacing families and damaging neighborhoods nationwide. Analysts predict a million people could lose homes this year and policy makers are grappling for responses. As a result of the real estate fcrisis, a rush of people desperate to keep their homes caused a 57 increase in Chapter 13 filings in Massachusetts for the fiscal year that ended in September.
However, there is one debt the courts can't touch, that is the mortgage loan on the home where you live. Bankruptcy courts are better equipped to save your car than to save your home. Now, with tens of thousands of Americans facing foreclosure unless their mortgage payments are reduced, support is growing to let bankruptcy courts modify mortgage loans.
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US Representative Brad Miller, a North Carolina Democrat, has proposed legislation allowing courts to modify mortgage loans. Stating that the" borrowers should have some rights and not just have to rely on the benevolence of lenders."
However, the bill is opposed by the mortgage industry, which warns that interest rates would rise for all borrowers. They claim that the mortgage exception protects lenders against a potential loss of revenue, which lets them offer lower interest rates. The legislation would apply solely to existing loans, but the industry says it still would undermine investor confidence that future mortgages won't again be modified.
The law would allow bankruptcy judges to cut a borrower's monthly payment by shrinking the size of the loan and by lowering the interest rate. The loan balance could be reduced to match the home's value. If a person owed $200,000 and their home was worth $175,000, the judge could reduce the loan amount to $175,000. The interest rate could be lowered as far as the prevailing rate on conventional loans.
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