House Foreclosures - Preventing Foreclosures

Preventing Foreclosures

April 2nd, 2008

Today as foreclosures march on relentlessly there is a surfeit of ideas and suggestions to stop the virus affecting all – borrowers, lenders, government society and economy. A big question is that should bankruptcy laws be adjusted to help borrowers?

There is a change in the air – inevitable with the arrival of the housing crisis. The Federal Housing Administration that made its debut in the Depression era needs a shaking up together with other plans related to mortgages. There is a suggestion that consumer advocates be given more importance in solving foreclosure issues – the target being to see that houses are not abandoned. This will involve granting of permission to bankruptcy courts to proceed with modification of those foreclosed units that are first time homes of residents. There is a veto cloud overhanging this proposal.

Currently under the present bankruptcy law (chapter 13) the courts cannot modify the mortgages on the prime residence although they may do so on vacation or second houses. Advocates representing the consumers feel that bankruptcy is a tool for adjusting debts so as to make it easier for borrowers to repay creditors over a certain period of time. It is an efficient and established way for helping troubled borrowers. Unfortunately the market is giving protection to owners of vacation and second houses but has nothing for the borrower struggling with threat of foreclosure, commented David Berenbaum of National Community Reinvestment Coalition.

The important point about modifications supervised by courts is that those who have ‘piggyback’ loans will be helped. These are second mortgages on the same house taken at the same time as the first loan. Lenders refuse second loan holders any modification unless the previous loans are cleared. Usually the first mortgage is paid totally before the second follows. Thus the holder of the latter has no reason to support modification that will result in total loss. The holder of the second loan thinks it prudent to wait and see if the borrower can continue before proceeding with foreclosure. For borrowers it is a trying task dealing with two servicers.

From January to September 2006 most of the loans were the piggyback variety as per report released by Credit Suisse. The figure spikes to 60% in places like Los Angeles, Las Vegas as well as Sacramento.

The Bush administration as well as the Mortgage Bankers Association are strongly against the amendment of bankruptcy laws. Their stand is that it will lead to more foreclosures.