The Pros and Cons of Bankruptcy Bill’s Effectiveness to Contain Foreclosures Ruffle Feathers

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The debate rages as the pros and cons of the bankruptcy bill’s effectiveness to contain foreclosures ruffle feathers. Ultimately due to intense pressure the terms had to be greatly watered down to suit the lending group. David Kittle the chairperson of Mortgage Bankers Association of Washington said, “We are pleased that the House moved to limit the harm this bill will do to consumers, and we want to work with the Senate to further contain the damage.”

Mark Ireland of Foreclosure Relief Law Project, St. Paul said that he did not think mortgage firms should be treated at par with auto financing companies and not differently. In the case of a car loan there are no restrictions on ability of bankruptcy judges to bring down the principal amount. Why should it be so in the case of something of far greater import like a property? However Ireland admitted, “But, if this is what can pass, Ireland added, then it will be a small step towards providing relief for a lot of people, and I support that.”

Apart from the bankruptcy provision many facets of the new plan initiated by Obama have won kudos both from the consumer advocates and the bankers of Minnesota.

As per the first section the house owners who have less than 20% equity stake on their properties there is an option of refinancing and taking advantage of the current low mortgage rates. This however applies only to those loans that are under the umbrella of Freddie Mac and Fannie Mae. This plan could reduce the monthly commitments of borrowers by about $100. Without this Obama plan these borrowers would have had no hope as the drowning real estate market had swallowed up all their equity.

Paul Schuster of Minnesota Mortgage Association commented that this was a “big shift.”

The second section of the plan will enable the borrowers facing foreclosure, improved access to mortgage modification talks with their lenders or bankers. The target was to induce lenders change the interest rates, the length of the contract and timing of making principal payments so that the borrowers were not forced to cough up more than 31% of their monthly earnings for the property. The money would be provided by the government to make this plan feasible by offering incentives to servicers.

Those who are current on their modified mortgages would see a reduction of $1,000 on the principal for each of next five years.