The Housing Chronicles Blog: No mortgage cram-downs for buyers in bankrtuptcy

Sunday, May 3, 2009

No mortgage cram-downs for buyers in bankrtuptcy

Delinquent homeowners in bankruptcy who were also hoping to achieve principal reductions and other loan modifications from bankruptcy judges are sure to be disappointed in the Senate's decision to vote down the measure. Still, the law only prevents such cram-downs for principal homes, and allows judges to enact measures for vacation homes and investment properties. In other words, maybe move out, treat it as an income property and THEN file? From a story:

The Obama administration lost a bid to add a powerful weapon in its fight against foreclosure Thursday, after the Senate voted down a proposal to allow bankruptcy judges to modify mortgages.

The defeat left many housing advocates questioning the effectiveness of the president's loan modification plan. The so-called cramdown provision, which would allow judges to reduce mortgage principal, would have put pressure on servicers to modify loans before borrowers file for bankruptcy...

Bankruptcy reform was a key part of Obama's foreclosure prevention plan, which was introduced in mid-February. It aims to encourage servicers to be more aggressive in modifying loans through a mix of carrots, in the form of incentive payments, and the stick of cramdowns. Servicers have come under fire for not helping enough homeowners through voluntary initiatives...

Servicers covering 75% of the nation's mortgages are now participating in the modification program, which calls for banks to lower troubled borrowers' monthly payments to 31% of their pre-tax income. Many major servicers said they have beefed up their loan workout departments to handle more calls.

However, most just started accepting applications, so experts say they won't be able to judge the program until the fall at the earliest. By then, hundreds of thousands of borrowers could lose their homes...

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