Bankruptcy judges may soon have right to reduce loan balances

While incentives for loan modification are the carrot for mortgage servicers and investors in President Obama's mortgage rescue plan, if they don't take advantage of that carrot, a big stick could whack them in the head. House Democrats have reached agreement on a bill that would let bankruptcy judges reduce the principal balance of a homeowner's mortgage loan, lower the interest rate and extend the terms, according to a story in The Washington Post today. Congressional aides speculate that a vote on this bill could come as early as tomorrow.

The compromise that was reached gives preference to lowering a homeowner's interest rate over cutting the principal balance. Also, if the balance is cut, the homeowner will have to share any profit from the eventual sale of the home. Both of these compromises were key provisions lobbied for by the financial services industry.