In an attempt to forestall the rising number of foreclosures across the country - and help some distressed homeowners in danger of losing their homes, the Obama Administration last week proposed his new $75 Billion Housing Recovery Plan.
One component of the plan involves incentivizing lenders to modify loan terms for a select group of home owners who might be "underwater" in their mortgage - in other words, they owe more on their home is worth in today's market.
(For an outline on the specifics of this plan, read this article in the Wall Street Journal by reporters James Hagerty and Lingling Wei.)
The new program, however, comes with an important modification that, if enacted, might "persuade" reluctant lenders to modify certain troubled loans. That modification - the ability of U.S. Bankruptcy Court judges to reduce the principal amount owed on the mortgage loan of the defaulting borrower's primary residence.
Faced with a threat of such a principal reduction might "persuade" reluctant lenders to modify a distressed client's loan to a more attractive interest rate and terms, rather than risking principal loss should the borrower end up filing for bankruptcy.
Currently, BK judges can wipe out thousands of dollars of secured and unsecured debt on behalf of a debtor filing for bankruptcy. They can reduce the amount of principal owed on investment property. But they are now prevented from reducing the balance owed on a mortgage loan for a primary home.
Such a change has long been fought by lenders, as well as the Mortgage Bankers Association. They fear forcing these principal reductions - called "cram downs" in the industry - could create new losses for banks, as well as instability in mortgage investment markets, and ultimately, higher interest rates as lenders better hedge their bets against these potential losses.
The program's proponents contend the helpful impact to those facing imminent financial collapse would far outweigh the yet-unproven response of higher interest rates. One Congressman who supports the bill, Democrat John Conyers of MI, blames banks for not acting fast enough to stem today's mortgage crisis.
Please see the Hagerty/Wei Wall Street Journal story for more.
Also read our post via BlogChicagoHomes.com.
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