Every time I write about foreclosures and the mortgage crisis, I feel like I have to leave a bunch of stuff out. This week was no exception.
Last Thursday, the Mid-South Peace & Justice Center held a summit about combating blight in local neighborhoods as part of its Issues First campaign. Then Monday, U.S. Congressman Steve Cohen hosted a subcommittee meeting about foreclosures at the U of M law school.
One thing panelists talked about were proposed changes to the federal bankruptcy code that would allow judges to modify mortgage loans. Currently, filing Chapter 13 allows for the adjustment of debts, with the exception of a mortgage loan for the debtor's primary residence.
There’s some concern that that would mean more bankruptcy filings, but David Kennedy, chief judge of the U.S. Bankruptcy Court for the Western District of Tennessee, testified that wasn’t the case.
“People in mortgage trouble are already in bankruptcy court. They will give up their cars, their pets, they’ll forgo buying medicine. They will do anything to be able to keep their homes,” Kennedy said. “I don’t believe there will be a flood of new filings, because these people are already in the courts. We just can’t help them.”
Congress has encouraged home loan modification through voluntary methods, but they haven't achieved much success.
"Our counselors have found that banks add their own restrictions to the[Home Affordable Modification Program] and the residents don't meet those restrictions," said Steve Lockwood with the Frayser CDC.
Lenders have been reluctant to embrace the proposal — "They don't want to give up control," Kennedy said — but some lenders have started to realize that it might be better for them to work with residents behind on their mortgages.
Once a home goes into foreclosure, lenders typically only collect a portion of the loan, typically about 50 to 60 percent.
Kennedy said that bankruptcy home modification would offer a workable remedy to reduce the nation's home foreclosure and economic crisis.
"Borrowers may avoid surrendering their homes and bearing the costs of relocation. Lenders may collect under a Chapter 13 plan more than they would receive under a foreclosure," he testified. "Neighborhoods may better retain their values. Tax bases would not be eroded to the same degree, and ultimately, individuals who want to be productive members of society may be more likely to successfully complete a Chapter 13 plan."