Home Loan Modification
The “Home Foreclosure Crisis” has caused a significant change in how mortgage companies deal with homeowners. With the bank bailout in 2008 it was hoped that mortgage companies would agree to rewrite loans to reduce the amount owed, the interest rate and therefore, the monthly payment.
Unfortunately, the experience has been that mortgage companies are cherry picking which loans they want to work with -- leaving the vast majority of homeowners out in the cold. In January, 2009 legislation was introduced in the United States Senate to change bankruptcy law to allow a bankruptcy judge, as part of a chapter 13 bankruptcy, to modify first mortgages, and completely remove unsecured second mortgages and home equity lines of credit. The judge can reduce the amount you owe on your mortgages to the value of the property, reduce the interest rate, spread the payments out over a longer period of time, and reduce your monthly payment. Past due payments would simply be forgiven if the value of the property is less that the amount of the mortgage. For example if you owned a home worth $100,000 and owed a first mortgage of $125,000 and a second mortgage of $20,000, the bankruptcy court would strip the second mortgage completely. The first mortgage would be reduced from $125,000 to $100,000. The interest rate would be reduced. The time for repaying the loan would be extended to 40 years minus the number of years you have already had the mortgage. All of this should result in a significant reduction in your monthly mortgage payment. Your payment would begin again on the 1st day of the month following the court’s ruling.
It is hoped that with bankruptcy court as a threat, many mortgage companies will choose to work out home loan modifications
out-of-court, but on the same terms and conditions the bankruptcy court could order. Obviously, home loan modifications and the bankruptcy court’s ability
to change the terms of mortgages are totally new concepts. It will take years to determine the extent to which mortgage companies are willing to agree
to out-of-court home loan modifications and before the full impact of the new bankruptcy court laws will be known.