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Pressuring Lenders to Modify Mortgages in Bankruptcy Cases — New Legislation

modifying mortgages in bankruptcy [1]Written by Craig D. Robins, Esq.
 
Forcing lenders to work out settlements with homeowners in bankruptcy is the subject of a bill that Senator Sheldon Whitehouse (D., R.I.) introduced last week.  Today there were hearings on the bill before the Senate Judiciary Committee.
 
The ideas under the proposed law, which would permit homeowners to modify their mortgages through bankruptcy proceedings, have been tossed around before and at times have been quite controversial.
 
Mortgage Cram-Down in Bankruptcy is the Bill’s Objective, But In a Voluntary Manner
 
Previous bills would have given debtors the ability to cram-down first mortgages in bankruptcy cases [2].  However, these bills never made it into law.
 
Currently,  mortgage cram-down in a bankruptcy can only be done with second mortgages [3]. 
 
Cramming down a mortgage in bankruptcy is not the essence of Senator Whitehouse’s bill; getting the lender to voluntarily agree to it, however, is.
 
The current bill would give bankruptcy judges the power to require foreclosure mediation between banks and homeowners.
 
The bill creates a mechanism for judges to supervise talks between homeowners and their lenders.  This could address the problem where a homeowner makes a reasonable settlement proposal to the mortgage lender, but the lender or its servicer rejects it — a rather common occurrence.
 
The Proposed Bill Permitting Bankruptcy Modification Would Help Cut Through the Bureaucratic Red Tape
 
One of the biggest obstacles in seeking a mortgage modification is the difficulty in getting though to individuals at the lender who have the authority to negotiate terms.  Take it from me, this can be a fruitless exercise in frustration.
 
The proposed bankruptcy modification bill would require that an individual with full settlement authority for the bank must show up for the mediation proceeding.  In addition, the bill requires the lender to be open to good-faith negotiations.
 
Senator Whitehouse believes that court-ordered talks could pressure mortgage servicers to modify mortgages that they wouldn’t otherwise agree to modify.
 
During the hearings, Senator Whitehouse also criticized the HAMP program which has not succeeded as intended — Something I’ve written about extensively.  See Problems with HAMP — Too Many to Count? [4]
 
Legislative Action is Needed to Curb the Number of Foreclosures
 
This is now more important than ever as foreclosures are expected to climb to 12 million by the end of 2012 and Long Island will certainly have its fair share of that number..
 
I’ve also written extensively before about the frustrations in persuading lenders to modify a mortgage.  See Why I Won’t Negotiate Loan Modifications [5]and Loan Modification Industry is a “Sham” Says Attorney General Cuomo ! [6]
 
New York Bankruptcy Judge Drain Testifies at Hearing
 
The New York Bankruptcy Courts in the Southern District have a pilot loss-mitigation program that enables debtors to confer with their mortgagees.
 
Judge Robert Drain, sitting in the Southern District of New York, testified that half of the mediations that take place in his court end in an agreement which is often a modification.  He said that the other half at least give the homeowner a clear understanding for why they are losing their home.
 
Judge Drain said that such programs are vital to sorting out the foreclosure issue.
 
Seeking Mortgage Modification in Long Island Bankruptcy Cases
 
There is currently an underutilized loss-mitigation pilot program here in the Eastern District of New York that has been in existence for just over a year.
 
I will discuss this program in a future blog post.
 
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