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Tweaking Bankruptcy Law Could Reduce Foreclosures

Homeowners missing protection now afforded boat owners

By Mark Huffman
ConsumerAffairs.com

November 9, 2007

The Center for Responsible Lending says 2.2 million families are still in danger of losing their homes to foreclosure because they are trapped in "exploding" adjustable-rate mortgages (ARMs) that are due to increase to unaffordable interest rates.

In fact, hundreds of thousands of families face rate increases at the same time that their houses are worth less than the balance on their mortgage.

Unable to find buyers, the CRL says these homeowners can’t even refinance.

Loan servicers who could modify loans to make them more affordable aren't doing so. The group cites a recent report by Moody's that loan servicers had only modified one percent of mortgages that increased to higher rates in January, April and July of this year.

“Unless Congress takes action, these families lose homeownership, surrounding neighborhoods lose property value, and the entire economy suffers,” the group warned.

The problem, it says, boils down to the law. Current bankruptcy law excludes home owners from relief now available to boat owners.

“People who own investment properties, vacation homes and boats are allowed to get loan modifications as part of debt relief, but the law specifically excludes homeowners from similar protections,” CRL said. “We urgently need legislation that would allow lenders and loan servicers to modify mortgages to allow families to continue paying on their loans and keep their home.

"This would provide judges the authority to modify harmful mortgages marketed by subprime lenders in recent years, and would help more than 600,000 financially-troubled families keep their homes,” the group argued.

The consumer group has done a lot of the research for Congress already. It says by deleting the phrase in section 1322 of the bankruptcy law that excludes, alone, the mortgage on a borrower's principal residence from the chapter 13 section, lawmakers would give bankruptcy judges the authority to modify secured debts.

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