Dec 23, 2008

Mortgage Modifications? Not so Fast!

In the last several months of 2008, the federal government and various private lenders have offered a variety of voluntary mortgage modification programs. The main ones are:

  • the HopeNow program (created in 2007 by a consortium of private lenders)
  • the Hope for Homeowners program (created by Congress as part of the Housing and Economic Recovery Act of 2008)
  • a program recently crafted by the U.S. Treasury Department which is only available to homeowners with mortgages owned or insured by Freddie Mac or Fannie Mae (which greatly resembles the HopeNow program), and
  • lender-specific modification programs offered by such entities as IndyMac, Bank of America, Citibank, and Wells Fargo.

Statistics released in a report by the National Association of Consumer Bankruptcy Attorneys show that these modification programs are themselves little more than a scam. Few modifications have occurred under these programs, and those that have are insufficient in terms or reductions to stem the tide of foreclosures other than on a very temporary basis. 

According to the NACBA report, many are the reasons why these programs have failed. Some of them are so insufficiently staffed that they're not much help while others offer the lenders insufficient incentives for them to agree to the modifications. Still another reason for failure is that many mortgages are owned by a variety of investors and it's impossible to bring the various investors collectively on board for any particular modification.  

Based in part on the failures documented in its report, the NACBA is pushing hard for a modification of the bankruptcy laws by Congress to allow Chapter 13 bankruptcy judges to reduce mortgages on principal residences to the value of the residence. Other sources indicate that such legislation will likely be introduced early in the Obama administration's term and will likely be successful.

While Chapter 13 bankruptcy is the obvious program to accomplish these modifications, many homeowners are unable to complete a Chapter 13 bankruptcy, which requires compliance with a repayment plan for a three to five year period. And, in many cases, homeowners won't qualify for Chapter 13 for a variety of reasons.

In my opinion, the bankruptcy legislation that is sure to be introduced in the next Congress should also include a program under which a mortgage can be modified in Chapter 7 bankruptcy. There is no inherent reason why Chapter 7 couldn't accomodate mortgage modifications -- as it stands, Chapter 7 already offers a procedure where the court determines the value of cars and other personal property for the purpose of deciding on a redemption price. This same procedure could be used to determine real estate values for the purpose of modifying mortgages. Allowing Chapter 7 bankruptcy judges to modify mortgages would greatly increase the number of homeowners who would be helped in bankruptcy court.