Bills Would Let Judges Remake Mortgages
Tuesday, November 20, 2007
Congress is considering legislation that would allow bankruptcy court judges to rewrite loan terms for people at risk of losing their homes, a change that supporters say could save half a million borrowers from foreclosure through early 2009.
Under this plan, judges could lower the interest rate of a mortgage on a primary home, extend the life of the loan or forgive part of the debt -- as they currently can for vacation homes, farms and investment properties. Doing so could reduce by a quarter the 2 million foreclosures expected in the next 18 months, according to Moody's Economy.com.
Of all the legislative proposals aimed at helping at-risk borrowers, this one is thought by consumer advocates to offer the most wide-reaching and immediate relief. The House has held two hearings on a bill introduced by Democratic members, Brad Miller of North Carolina and Linda T. Sanchez of California. Similar legislation has been offered in the Senate.
Pressure for action is building as the number of foreclosures mounts. Some advocates say courts should step in because lenders are not moving decisively enough. But lenders say the legislation would increase mortgage costs for borrowers and encourage some to use the courts as a cheap alternative to refinancing, causing bankruptcy filings to spike.
Stuck in the middle are borrowers like Joanna Jarvis, a private investigator, who said she could no longer afford the house she bought in Sterling seven years ago.
Jarvis, 34, refinanced her mortgage three times, most recently to invest in a car-repair business. She planned on refinancing that adjustable-rate mortgage before it reset. But the real estate market soured. The value of her home dropped. Her business foundered. And her monthly payment jumped to $5,000 in August, from $3,600.
Jarvis said she turned to her lender for help, provided all the documents the lender requested and kept up with her payments as long as she could, even after the loan reset. But she never heard back from the lender. She has now missed two payments and may file for bankruptcy protection.
"I've got no more energy to fight with the lenders," Jarvis said. "I'm ready to go in front of a bankruptcy judge and say, 'I tried.' "
At issue are Chapter 13 personal bankruptcies, which immediately halt foreclosure sales and freeze all collection actions for debts that predated the filing.
The court then approves a repayment plan that determines which creditors get paid and when.
Under this arrangement, a person has three to five years to make missed mortgage payments.
But while trying to make good on past debt, filers must keep up with their regular mortgage payments and other expenses.