Revising the Bankruptcy Law is a Stretch to Resolve Foreclosure
Four to eight million homeowners are now foreclosure-troubled. The congress has been searching for solutions like voluntary readjustments from the lenders but nothing seems to be working efficiently. So a risky solution called the amendment of the Bankruptcy Law was formulated.
The old Bankruptcy Law does not allow judges to adjust the total loan, principal payments, and interest rates of homes. But the proposed change wishes to let the foreclosure-troubled use bankruptcy claims to save their homes from repossession. Lenders will lose their control in primary home loans.
Bankruptcy claims may pile-up that if the legislation will not be very specific in implementation.
Three provisions were formulated: 1. only prevailing mortgages would be entertained; 2. the foreclosure-troubled must present a proof that they contacted their lenders for loan modification before filing for bankruptcy; and 3. only a main Truth Lending Act provision allows a lender to cancel the borrower’s bankruptcy.
But the greatest jeopardy of changing the bankruptcy law is the possibility of higher mortgage rates in the future. Interest rates had been low since foreclosure attacked the housing industry. But if borrowers get to keep their homes through bankruptcy claims to the judge, lenders will have no choice but to increase mortgage rates.
A way to liberate the credit market is making a market for billions in Collateral Debt Obligations and other securitized mortgages. This is only possible if investors can assess the value of underlying mortgages. But if mortgages can not be modified because of bankruptcy claims, no investor assessment of underlying mortgages can be done.
The change in the bankruptcy law hopes voluntary loan modifications of lenders, for if they do not modify, bankruptcy judges would bring rates lower. Yet, if mortgage rates are lower, investor may be able to determine the market value of CDO and other security loans to get the secondary mortgage market trading again.
Lenders and investors have already experienced losses. The changing of the bankruptcy law may be risky but it may also be helpful. So, the law revision must be clear and must only apply to the victims of predatory lenders. If not, mortgage rates may take its revenge in the future.
