Support, criticism for plan to rewrite mortgage-loan terms

WASHINGTON – Sept. 26, 2008 – A plan by Democrats to allow bankruptcy judges to rewrite mortgage-loan terms for struggling homeowners as part of the proposed $700 billion Wall Street bailout has the support of some South Florida jurists.

The judges say the proposal would let them lower the interest rate on home loans for borrowers who enter Chapter 13 bankruptcy because of a pending foreclosure. A Chapter 13 allows individuals to reorganize their debts.

Right now, bankruptcy judges can modify the terms of all kinds of loans except those on a first home.

“Since we can’t help [homeowners], they end up losing their home and that may mean breaking up their family and putting them out on the street,” said U.S. Bankruptcy Judge A. Jay Cristol in Miami.

Added U.S. Bankruptcy Judge Laurel M. Isicoff, also in Miami: “Every bankruptcy judge I’ve spoken with feels strongly that this is a tool that they should be given.” She has talked with about 30 judges, she said.

Cristol said the proposal is a “win-win” for homeowners and lenders. Homeowners keep their house and lenders have a performing loan rather then getting the keys to a property they’ll then have to sell.

Bankers’ view

Not everyone favors the plan. The Mortgage Bankers Association, which represents about 2,400 companies, said allowing bankruptcy judges to alter residential mortgages will raise borrowing costs because it would add additional risk for lenders and investors who buy the loans.

“When lenders and investors see new risk, they are going to demand a higher price and that gets passed on to the consumer,” said John Mechem, a spokesman for the group.

A similar effort was part of a housing rescue package that Congress debated earlier this year, but that part of the legislation didn’t go anywhere.

Lenders have helped two million homeowners avoid foreclosure through loan modifications and workout plans in the last year, Mechem said. “Are we going to be able to help everyone? Unfortunately, not,” he said. “If a borrower loses a job, there is no loan modification that can help someone who has no income.”

RealtyTrac reported about 3.3 million households have gone into foreclosure since the beginning of last year through last month.

Timothy Kingcade, a Miami bankruptcy lawyer, also has reservations about the plan because he’s worried it could “destabilize” the real estate market, particularly if judges can compel lenders to reduce the debt to equal the value of the house. That’s known in bankruptcy as a “cram down.”

“If you allow home mortgages to be crammed down, banks are going to be extremely hesitant to lend,” Kingcade said.

‘Back on track’

Debtors wouldn’t get a free ride, said Isicoff. They’d have to prove in Chapter 13 that they can make mortgage payments before a judge would agree that debt should be lower. “There are people who, if they can pay less, can get their lives and mortgages back on track,” she said. “Why wouldn’t you want that to occur?”