Bills Would Let Judges Remake Mortgages

These days, that may not make financial sense because so many people are upside down on their mortgages, meaning they owe more on the home than it is worth. Jarvis, for instance, owes $536,000 on a house she says is now worth less than $500,000.

"Many of those people are just walking away from their houses," said Nancy Ryan, a bankruptcy lawyer in Fairfax County. "There's nothing in the law as it exists today that would make it feasible for people to keep their houses."

To help those borrowers, the bill would allow judges to reduce the principal of the loan to the home's "fair market value." The rest would be treated as unsecured debt, and the borrower could end up paying little or none of it.

Lenders say investors pumped money into the mortgage market knowing each loan they funded was secured by an asset -- the home.

Allowing judges to change the loan terms would create uncertainty about that asset's value. To offset the risks, lenders would demand larger down payments, charge higher interest rates and get more picky about borrowers, said Kurt Pfotenhauer of the Mortgage Bankers Association.

On the contrary, the approach would benefit homeowners and neighborhoods, said Eric Stein of the nonprofit research group Center for Responsible Lending, which estimates that 44.5 million homeowners living near foreclosed properties will see home values drop by an average of $5,000, as foreclosures surge. "The impact of foreclosures on local communities are far worse than any impact these bills would have on the mortgage market."

The changes would not lead to higher mortgage costs because the troubled loans are a small percentage of all mortgages, said William E. Brewer Jr., a bankruptcy lawyer in North Carolina.

"The lenders' knee-jerk reaction to any kind of regulation is that the it will make everybody's costs go up," said Brewer, who serves on the board of the National Association of Consumer Bankruptcy Attorneys. "There's no empirical evidence of that. There's no evidence that loans for rental properties are higher because those loans can be modified in bankruptcy."

But critics of the legislation said this frequently cited analogy is not valid because it is not practical for people with investment properties to modify these mortgages under current Chapter 13 rules, which require borrowers to repay the entire loan within five years. The new proposal would not put such a limit on homeowners.

To address some of the industry's fears, competing Republican-sponsored bills would limit modifications to borrowers whose loans were granted in a certain time period. Lawmakers from both parties are trying to craft compromise legislation.

But that does not mean there is a solution for every troubled borrower. Some can't be reached to work out a deal. For others, a plan would only delay the inevitable. And for some, such as Libby Lopez, no modification would make sense.

Lopez, 74, bought a one-bedroom condo in Falls Church in 2004 with no money down. She was a prospering loan officer at the time and could afford her $1,700 monthly payment. But that payment increased by $200 when her loan adjusted in mid-2006, and the loan has kept adjusting every six months thereafter.

As the payments climbed, Lopez's income vanished when the real estate market slowed and commissions dried up, leaving her with just $927 in Social Security payments each month.

Lopez, who was upside down on her loan, could not refinance. So she borrowed from her credit cards to pay her mortgage. Overwhelmed by debt, she filed for bankruptcy in June 2007, liquidated her assets and gave up her home. Lopez now lives with a friend.

Allowing judges to modify loans is a great idea for many people, Lopez said. "But it would not have done me any good. I had no money."