A new law that would allow bankruptcy judges to modify the terms of mortgages on primary residences seems a certainty now, according to a Reuters report.
Democrats in both the House and Senate are reportedly preparing a plan to introduce such legislation that should get president-elect Barack Obama’s blessing once it reaches his desk.
Similar bills were strongly opposed by industry groups like the Mortgage Bankers Association and President Bush, and were eventually shot down last year before they had the opportunity to become law.
Opponents of such bills have argued that interest rates on home loans could jump one-and-a-half to two percentage points higher as a result, and would further restrict already tight lending conditions.
The MBA in particular has argued that a so-called “bankruptcy cram down” would make it more difficult for lenders to assess property values, leading to higher down payment requirements and closing costs.
Proponents of the bill, mainly consumer advocacy groups, believe it could help distressed homeowners work more effectively with their lenders to find viable solutions other than foreclosure.
Though a cram down bill looks extremely likely to pass time around, it will surely be limited in scope, possibly only available to those with “subprime loans,” and probably only on a temporary basis.
Interestingly, last month the now quite desperate National Association of Homebuilders flip-flopped on their mortgage cram down stance, with chief executive Jerry Howard now supporting a temporary provision.
Current law allows bankruptcy judges to modify terms and reduce principal balances on second homes, but not primary residences.
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