Bills could let judges rework mortgages

Bankruptcy court building.

TEXT OF STORY

TESS VIGELAND: If banks won't modify mortgages, maybe judges will. That's the idea behind two nearly identical bills making their way through the House and Senate. They'd give federal bankruptcy court judges the power to rework the terms of mortgages headed into foreclosure. They could adjust interest rates or even reduce the principal on loans.

Lenders have opposed bills like these for years. But as Marketplace's Steve Henn tells us, the idea is gaining momentum on the Hill.


STEVE HENN: The bills allow federal bankruptcy court judges to slash interest rates and principal for homeowners who file for bankruptcy. Backers say this could keep millions of Americans from losing their homes. But similar bills stalled in the House and Senate last year.

And opponents like Scott Talbott at the Financial Services roundtable say allowing judges to reduce mortgage payments will cost banks a lot of cash. Those banks will have no choice but to pass on their losses.

SCOTT TALBOTT: Through higher interest rates, higher down payments, high closing costs, so all three.

But some academics say foreclosures actually cost banks even more.

Adam Levitin: Losses in foreclosure are going to be much greater than losses in modification.

Adam Levitin is a bankruptcy professor at Georgetown University Law School. He says right now mortgage servicers that collect payments for banks often fail to renegotiate home loans even when that would ultimately save lenders money. Why? Because it doesn't pay.

LEVITIN: But if they foreclose, the servicer is able to collect any fees that it can levy. And this gives servicers a great incentive to lard on all the fees they can. These fees get paid off the top in a foreclosure.

Levitin says the bill would let bankruptcy judges cut mortgage servicers out of the equation entirely, keep more Americans in their homes, and could even save banks billions. Many bankruptcy judges say they like that idea.

And with President-elect Obama about to assume office, even the bill's opponents say it's likely to become law.

In Washington, I'm Steve Henn for Marketplace.

About the author

Steve Henn was Marketplace’s technology and innovation reporter for the entire portfolio of Marketplace programs until December 2011.

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