Obama’s Biggest Stick in Preventing Foreclosure is the Bankruptcy Clause

March 10th, 2009 | Tags: Foreclosure Solutions

So far only carrots have been doled out to appease the makers of the foreclosure crisis – primarily the lender group. But Obama was wielding another tool – his biggest stick in preventing foreclosures is the bankruptcy clause. From the trend of events it seems that he is about to lose it.

The plan of the government to plug the rush of foreclosures is depending on the Congress to amend the bankruptcy laws and empower the judges to modify mortgage terms in particular cases. It will make the amount of payment made every month by the borrower more affordable.

This cram-down clause would pressurize loan servicers to modify the loans prior to the filing of bankruptcy by the borrowers.

So far there has not been much success with the foreclosure plans being initiated one after another by the administration because of the voluntary character of the moves. The loan servicers did not come forward sufficiently enough to help the besieged borrowers. But if they know that the latter will get relief for the judges the servicers are bound to be more amenable to reason.

Rep. Brad Miller (Democrat) who is working on the bill said, “Reforming mortgage bankruptcy laws is the only remedy available that will provide the stick to go with the carrots that we have offered lenders to modify mortgages voluntarily.”

Unfortunately the Democrats in the Congress who were the first ones to introduce the bill that would have widened the power of the judges two years ago are now running into difficulty garnering the required number of supporters. The House put in abeyance a vote on this measure till the following week after the Democrats themselves voiced concerns. Its fate in the Senate is in doubt because many powerful Republicans have all along been strongly against it.

Certain terms of the bill have been watered down thanks to the strong lobbying done by the banking group. It would apply only to those loans contracted prior to the passing of the bill. The judges could change the terms so that the monthly payments were made more reasonable and the principal amount slashed. The servicers loathe this point. The debtors would have to notify their servicers at least 15 days before filing bankruptcy.

It is calculated by the Congressional Budget Office that more than a million houses would be saved if judges were empowered to alter terms of the loan.