Heated Debate Is on Whether the Bankruptcy Factor Will Contain or Further Mire Foreclosure Crisis

minnesota-flights

There is a heated ongoing debate about whether the bankruptcy factor in a bill will contain or further mire the foreclosure crisis. It has led to rifts within the Democrats.

Prentiss Cox a law professor of Minnesota University noted, “The bankruptcy plan would be the only solution to date that forces the lenders to do what needs to be done: Recognize the reality of the losses already incurred in the home — the loan collateral — and then unilaterally take the loss.” He also observed, “It will force lenders to make changes that they otherwise should have been doing, and give them an incentive to work with any homeowner on a modification under the Obama plan if at all possible.”

Bankers however are seeing it from a different angle. Joe Witt of Minnesota Bankers Association said that the plan newly introduced by the Obama government would give incentives to the lenders to modify their soured mortgages and hopes to go forward in solving the problem. But by allowing borrowers to a modified agreement through the court is not fair on lenders who have been trying to take correct steps. The bankruptcy judges could ask for deep slices in the principal amount due to the banks – much more than what should be prudent. This will leave the lenders with no other alternative but to pass along the cost to future borrowers.

Tom Kelly, a conservative and a senior fellow of Center of the American Experiment is one of the think tanks of Minneapolis. He opines that by interfering the recovery of the real estate market would be delayed. He calculated that ten years of the housing bubble caused the price of house to rise to 35% beyond the point where they should have rested in relation to income levels. Kelly said, “That needs to be resolved. Everything the government does to prop up prices prolongs the economic pain.”

The House of Representatives gave the green signal to the legislation on 5th March by a vote of 234/191. Kind was the only Democrat to cross party lines and vote against the bill.

After introduction the bill was greatly watered down. Borrowers trying to modify mortgages through bankruptcy courts would have to first try to contact their lenders or servicers for voluntary modification. This attempt would have to be supported by proof. The bill would apply to only the existing mortgages and not to any new loans being processed.