THE much-touted Obama stimulus package currently making its way through Congress may contain a proviso amending bankruptcy law allowing bankruptcy judges to modify mortgages. This amendment has been very long in the making and recently gained prominence in the presidential debates when president elect Obama said that his answer to the mortgage and foreclosure crisis is to amend bankruptcy law to empower bankruptcy judges to modify mortgage terms. For the first time since the housing crisis began, Citigroup, a major mortgage lender agreed last week that bankruptcy courts should be allowed to order reductions in the principal of upside down loans for some troubled borrowers, cracking what had been fierce and unified industry opposition.
The agreement struck between Democrats and Citigroup would permit bankruptcy judges to change the terms of mortgages as part of court ordered debt restructuring. Democrats hope to include the provision in the upcoming economic rescue legislation under negotiation between Congress and the incoming Obama administration. Under current bankruptcy law, bankruptcy judges have no power to modify the terms of mortgages under any circumstance other than lien stripping a second trust deed and converting it into an unsecured debt where there is no equity supporting it. Judges can only freeze defaults on mortgages and give borrower 36 months to pay off the default while resuming current mortgage payments. As a result, homeowners who go into chapter 13 often wind up with mortgage payments, which are even higher than what they had before. Some Democrats say that it is the unwillingness of creditors to reduce the principal on mortgages that is causing many homeowners much difficulty in obtaining a meaningful modification of their mortgages to save their houses from foreclosure. I am sure that many of you have gone through the musical chair scenario of trying to modify your mortgage. Nowadays, despite all the hype about bail out funds being earmarked to purchase mortgages to facilitate modifications, getting a loan modified is almost impossible to get.
Whether this measure actually makes it into the stimulus package remains to be seen. It was termed a deal-breaker in last fall’s $700 billion Wall Street bailout bill and was left out of the final package. But Democrats said Citigroup’s turnaround could be the crack that breaks the banking community’s opposition to this idea. Last month, the powerful National Assn. Of Home Builders also switched positions, removing its objections to a similar bill in the House sponsored by the Democrats. That move was another signal that the bloc of industry groups opposing the legislation is breaking down as the foreclosure crisis worsens. Foreclosures have quadrupled since the fall of 2007 affecting more than 8 million homeowners nationwide. Indeed, it catapulted Obama’s theme of change into the limelight, and destroyed McCain’s chances of winning the presidency.
Apparently CEO’s of most of the major banks in the country have hopped on board the proviso. At the very least, Democrats hope that the banking industry will not oppose it even if they do not support it. Industry groups remain concerned that the bill would apply to all mortgages, not only the sub-rime loans that started the current economic crisis. It is argued that this proviso will provide some homeowners with an incentive to seek bankruptcy or buy a larger house than they may be able to afford because they will have the ability to seek a modification of the mortgage for lower payments if the house is upside down.
For those of you who have too much debt and want to start fresh without debt, the classic chapter 7 case will do to make you productive again. Consult with a bankruptcy lawyer of your choice. He or she can help you keep all if not most of your assets while getting rid of your debts.
If you need debt relief, contact my office. I will analyze your case personally.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.
( Published on January 17, 2009 in Asian Journal Los Angeles p. C4 )
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