Foreclosures Might Drop 20 Percent Thanks to a Bankruptcy Fix

by Simon Lindsay on Foreclosures

The housing recession for the past two years has increased foreclosures to record levels as more and more families are struggling to make payments on properties that are decreasing in value. Despite these hard times, there is still something to be optimistic about.

According to a Credit Suisse report last Monday, the plan to let bankruptcy judges lower a loan amount or erase some mortgage debt can help decrease foreclosures by as much as 20 percent and even alleviate the distressed housing market.

Moreover, a “cram-down” or lowered loan amount will provide an incentive for mortgage companies to curb more failing loans on their own. Supporters of the mortgage cram-down contend that bankruptcy judges are exclusively able to slash through mortgage contracts and rewrite loan terms.

The new bankruptcy reform is expected to boost loan mods, specifically in principal reduction mods, since it will most likely to both pressure and provide justification to servicers to more effectively engage in principal reduction mods. Democratic leaders who manage the White House and Capitol Hill will advocate the cram-down bill early this year.

In addition, the report states that the cram-down bill can help a significant percentage of delinquent borrowers and provide a 20 percent drop in foreclosures.

However, a separate report from Friedman, Billings, Ramsey & Co state that although the cram-down bill can reduce foreclosures, it cautions that modifying the bankruptcy rules through increased mortgage rates and reduced affordability will probably create long-term problems for the housing market by further destabilizing home values and causing mayhem on second-lien and consumer lenders. Bankruptcy judges would most likely wipe out second-lien holders, also hurting lenders that specialize in those loans.

Most distressed consumers and those on the verge of foreclosure will be persuaded by the opportunity of getting assistance through the courts. An increase in bankruptcy filings will signify more write-offs across the sector and cause a surge in credit card losses, since lenders are obliged to charge off the account upon receiving the bankruptcy notice.