Study Suggest Reasons For Failure of Voluntary Mortgage Modifications And Solution Through Chapter 13 Changes

Mortgage lenders' voluntary loan modification programs have given many homeowners hope that their bank will negotiate with them to help save their homes from foreclosure. However, a study sponsored by an organization of bankruptcy attorneys (the "NACBA") found that the voluntary loan modifications are not helping homeowners, and in some cases, are making matters worse. The study reported that less than 10% of the time do the mortgage lenders voluntary result in reduced principal loan balances as more than half of the modifications involve nothing more than capitalizing unpaid interest and fees into a larger mortgage balances. According to the study, only about one-third of the voluntary mortgage modification reduce monthly payments and nearly half actually increase payments as a result of the mortgage modification process.

The groups offered several reasons why  voluntary mortgage modifications are not solving housing problems. For instance, mortgage notes transformed into investment securities end up being owned by multiple institutional owners all of whom would have to consent to a modification. Mortgage service companies are often concerned about being sued by one of the mortgage owners if the service companies agree with the homeowner to a modification plan. Where there are multiple mortgages on one home all the mortgages must agree; a homeowner's modification of a first mortgage will usually not solve his financial problems if a second or third mortgage does not also modify their mortgage. Also, the NACBA noted that mortgage service companies are overwhelmed with mortgage defaults and modification request. Foreclosures is an automated process while loan modifications must be done on relatively time-consuming case by case basis. The mortgage companies and service companies are having trouble keeping up with modification request, and by the time they can deal with a homeowner's request it is often too late to save the house from foreclosures.

The NACBA proposed solution is to change the bankruptcy laws to allow Chapter 13 debtors to cram down their mortgage principal balance to current house value as part of a Chapter 13 bankruptcy plan. One  argument in favor of changing Chapter 13 laws is that bankruptcy courts provide a nation wide legal system already in place where judges could force mortgage modifications to save homes from foreclosure. Lenders oppose this change in the law arguing that allowing bankruptcy courts to stip away mortgage debt will make future mortgage loans more expensive and difficult for everyone including borrowers with good credit.

posted by Jonathan Alper, banrkutpcy and asset protection attorney, Orlando, Florida

Comments

[Mark Hankins]

The argument that mortgages will be made more difficult to obtain in the future is self-serving at best.

First, loose lending practices were what *caused* this problem, and they have already been tightened. An additional incentive to keep lending practices on the responsible side hardly seems problematic.

Second, as I mentioned in my October 2 comment, BK judges are hardly cowboys, and BK court is the right place to deal with debt on a nationally-consistent basis. Further, Chapter 13 is not an instant fix for the borrower, it's an uncomfortable five year process. The BK reform of 2005 was all about lenders getting what they wanted, and what they got was a financial crisis of unprecedented proportions ... maybe it's time to tilt the playing field back toward the little guy.