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.

Another provision of the compromise is that before a homeowner seeks relief from a bankruptcy judge, he or she will have to show that he or she sought modification from his or her lender. If the lender offered to lower the homeowner's payments to 31 percent of the family's income and that was refused, the homeowner likely won't get additional help from a bankruptcy judge.

Mortgage delinquency rates continue to rise. TransUnion reported that 4.58 percent of borrowers are at least two mortgage payments behind, up from 2.99 percent during the same period last year. Florida and Nevada, two of the hardest hit states, have delinquency rates over 9 percent.

In releasing the data, Keith Carson, a senior consultant for TransUnion's financial services group, said, "Unfortunately, the mortgage sector continues to experience increases in the delinquency rate due to worsening economic conditions in both the labor and financial markets." TransUnion forecasts that the delinquency rate could reach eight percent or more in 2009 and then stabilize in 2010.

Lita Epstein has written more than 25 books including "The 250 Questions You Should Ask to Avoid Foreclosure."
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