Bankruptcy Modification of Home Loans

Bankruptcy allows change of loan terms for loans on many types of real estate.  The reason this power is given to the bankruptcy courts, is that a bank or other lender would only recover the value of the property if it went into foreclosure.  By changing the loan terms to give the lender the same amount of money it would get if it foreclosed, the borrower would get to keep using the property without any loss to the lender.  The technical term for this process is called, believe it or not, “cramdown”.

Congress allows cramdown of the loan balance to the property value in three types of bankruptcy cases.  A cramdown can be ordered in cases under chapters 11, 12 and 13.  However, with the exception of a family farm in chapter 12, the bankruptcy laws will not allow a cramdown when the real estate is the debtor’s home.  This means that a homeowner is not allowed to use this valuable tool to save their home from foreclosure.

Congress is now considering new laws to help homeowners save their homes by changing the loan terms.  In a recent web article, bankruptcy lawyer Brett Weiss discusses recent comments by the founder of a notorious sub-prime default loan servicer, Larry Litton.  Clearly, some lenders do not like this proposed change to the bankruptcy law.

There is no doubt that the change would help homeowners keep their homes when they are short of money and they face foreclosure.  I, for one, believe the change would benefit everyone.  The lenders only want their money and not the house.  When home prices are falling, a foreclosure can cost them even more.

Not only does foreclosure of homes cost the homeowner and the lender, it can drive prices down for entire communities.  The recent news is full of articles about neighborhoods were every other house is offered for sale by a bank or loan company.  This is because the banks, like you and me, can only get their money out of a house by selling it.  They have foreclosed so many houses that the banks are now in competition with each other, trying to sell them.  With so many houses on the market, the price is going down even more.

Houses without homeowners in them are subject to vandalism, illegal occupancy by criminals for various purposes, and can decline in value quickly.  With a mortgage market in termoil, and home loans in short supply, this is not in the best interest of anyone involved in the process.