In an effort to stem the foreclosure crisis, Congress is considering making a substantial change to the way mortgage loans are handled during bankruptcies. As MarketWatch reported Jan. 27, the House of Representatives has passed a proposal that would allow bankruptcy judges to change the terms of a home loan for a primary residence -- the home where the owner actually lives on a day-to-day basis. That includes the power to reduce the principal owed on the mortgage, which is commonly called a mortgage cramdown. As an Anaheim bankruptcy and loan modification law firm, we are following this debate with great interest.
Under federal bankruptcy laws that went into effect in 1979, judges are free to change the terms of a loan on a second home or an investment property -- but not for a primary residence. As things currently stand, homeowners must seek a loan modification for their mortgages before they file for bankruptcy, or else they must strike a deal with the lender in bankruptcy court. The proposed legislation would change this -- but it would also hurt the lending industry financially. Not surprisingly, the AP reports that lenders and their lobbyists are spending tens of millions in an effort to defeat it, although major player Citigroup Inc. has dropped its opposition.
Bankruptcy judges like the idea too, according to another piece by the Wall Street Journal. One judge told the newspaper that striking voluntary loan modification deals with lenders is nearly impossible when the mortgage has been sold as a security to a group of investors, all of whom would have the right to refuse a deal. Another suggested that the change would be a winner for everyone, because families would have another chance to keep their homes and lenders could avoid being forced to sell foreclosed homes at a loss.
As Southern California lawyers who handle both bankruptcy cases and mortgage loan modifications, we know millions of Californians could benefit from this rule change. However, homeowners must file for bankruptcy in order to take advantage of any new law that passes -- and bankruptcy isn't right for everyone. For some homeowners, bankruptcy's negative effect on their credit ratings and financial flexibility far outweighs the legal protections it offers. And so far, the proposed law has been limited to Chapter 13 bankruptcies, which are harder to get and harder to complete.
Homeowners who want to avoid bankruptcy are always free to strike a voluntary loan modification deal with their lenders. In fact, lenders deluged with foreclosed boondoggle properties may be more open to the idea than ever. An Orange County loan modification lawyer can help by explaining your rights to you and the lender; dealing with predatory, harassing or unfair lenders; and cutting through red tape.
Howard Law LLP has had substantial success helping clients change their interest rates, extend their loans and convert to a more manageable type of loan. We offer free consultations to potential clients seeking to learn more about how we can help, so there's absolutely no risk in speaking to us. To set up your own free case evaluation, you can call us at 1-800-872-5925 or contact us online.