Tuesday, Dec. 12Posted 4 p.m. EST
Proposed bankruptcy changes compared with new federal plan
A plan that would allow bankruptcy judges to alter home mortgages is facing some scrutiny, even as a new idea to fix the subprime mortgage crisis is unveiled.
The news media was all abuzz last week when U.S. Treasury Secretary Henry Paulson unveiled a plan that would institute a five-year interest rate freeze for some homeowners who purchased their home with a subprime loan.
I noticed a report on Forbes.com that mentioned this plan would be more acceptable to members of the financial industry than one proposed by Sen. Dick Durbin of Illinois that would allow bankruptcy judges to modify mortgages.
Durbin's Helping Families Save Their Homes Act, which was introduced in October, lets Chapter 13 repayment plan bankruptcy filers work with a judge and the lender to change the mortgage so payments are more affordable.
The bill gets rid of conditions in the bankruptcy law that prevent the modification of mortgage loans on a individual's primary residence; extends the time frame debtors are allowed for repayment; and waives the prefiling bankruptcy counseling requirement, along with some other tweaks to the law that Durbin thinks will help smooth the bankruptcy process for homeowners.
The Forbes reports that the financial industry is almost certain to embrace Paulson's plan.
Some insiders have suggested Durbin's proposal would cause consumers to take on extra costs and make it harder to originate and sell mortgages in the secondary market.
Mark Zandi, chief economist and co-founder of Moody's.com, attempted to convince industry professionals otherwise at a recent hearing of the Senate Committee on the Judiciary that examined Durbin's plan.
Zandi explained in his statements that the cost of foreclosure to lenders is much greater than that associated with a Chapter 13 repayment plan bankruptcy.
Not only is there no cause to believe the cost of mortgage credit across all mortgage loan products should rise, he adds, but there's also no evidence indicating that secondary mortgage markets "will be materially impacted after a period of adjustment."
Congress should provide firm guidelines to bankruptcy courts to deter abuses, he suggests. For instance, a formula should be created to determine the term to maturity, the interest rate and the property's market value.
I spoke with a Durbin aide who says neither plan is better than the other and in fact they're complimentary.
What do you think? Tell us your thoughts at bankruptcyblog@bankrate.com.
