Can Loans Be Restructured To Stop Foreclosure?

Nov 17th, 2008 @ 4:50 PM by Alden Smith

Researching for today’s post led me to an editorial that made a lot of sense to me, and one that I hope is brought to fruition. Basically, some members of Congress are advocating the restructuring of loans so that people who are in danger of foreclosure will be able to make the monthly mortgage payment. Sen. Christopher Dodd, D-Conn., chair of the Senate Banking Committee, wants Congress to pursue legislation that would open the option of bankruptcy protection to people who face losing their homes. In Chapter 13, this would allow payment to continue, and the homeowner the ability to stay in the home, while paying down the mortgage, even though at a reduced rate. Why does this make sense? Think about it - no bailout money needs to be dug up and spread around, and it is a win-win situation for both homeowner and lender. This move would also improve the stability of the housing market and bring order to mortgage foreclosures.

This makes sense in the best possible way. Currently, homeowners have no protection for their primary resident. I find it odd that they can get bankruptcy protection for vacation homes and cars, but no protection for their mortgage and primary residence. This line of reasoning makes perfect sense when you realize that what has put the hurts on the major bank’s balance sheets is the asset of homes. Allowing bankruptcy courts to allow restructuring of mortgages means that the homeowner has a place to live, and the mortgage company is getting paid. It would make better sense to reduce assets like cars and vacation homes and apply this to the mortgage to make an even better scenario for all parties concerned.

Sen. Dodd also expects more from the banking industry. Without that, no amount of hard work can come to much. In a Banking Committee hearing, Dodd had this to say: “I think I speak for many members of the committee and the Senate in saying that we want to see more progress from our friends in the financial sector — more progress in foreclosure mitigation, in affordable lending, and in curbing excessive compensation. And if that progress is not forthcoming, we are prepared to legislate.”

If legislation happens in this case, it stands to reason that the banking industry would lose control over the process if a mortgage goes to bankruptcy court. We can only hope that if this appears to be forthcoming, that banks will be prepared to work closer with troubled borrowers to make things work. I hope that this legislation is made reality. It is one less thing we would have to clean up.

Posted in Mortgage Refinancing, Mortgages
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