One part of President Obama’s $75 billion housing bailout plan that deals with “judicial modifications” has received the support of some lawyers and consumer advocates who feel it may be just the push lenders need to ramp up home loan modification efforts, reports the Dallas Morning News (“Threat of Judges Changing Mortgage Terms May Motivate Lenders,” Feb. 23, 2009).

The proposed legislation, which would alter the current U.S. Bankruptcy Code and give bankruptcy court judges the power to provide mortgage relief to homeowners, will soon be debated by lawmakers in the House of Representatives.

Under the bill, judges could reduce the principal of the mortgage loan, extend the loan terms, or reduce the interest rate for families who have “run out of other options.” These judicial modifications would be limited to primary residences with mortgages owned or serviced by the government-owned lenders Fannie Mae or Freddie Mac.

“At a time when an estimated 6,600 American families are losing their homes to foreclosure every day, we welcome the Obama administration’s support for changes to existing bankruptcy laws that will allow for judicial modification of home mortgages,” said Cary Ebert, president of the National Association of Consumer Bankruptcy Attorneys.

“The Obama administration is the latest major player in this national debate to recognize the fact that judicial modification must be part of the solution to today’s worsening home mortgage foreclosure crisis,” she said.

New Law Could Help Homeowners Avoid Bankruptcy Court

Those who oppose the bill, referred to as “cramdown” legislation, say it would force lenders to accept loan modifications made by bankruptcy judges without being able to offer their own input. Lenders claim that it could increase their losses, which would be passed on to borrowers in the cost of future home loans.

“We are disappointed to see the president endorse bankruptcy as a means to help delinquent borrowers,” said David Kittle, chairman of the Mortgage Bankers Association.

Supporters contend that the legislation could be just what is needed to force lenders to start aggressively modifying mortgages and prevent hundreds of thousands of homeowners from ending up in bankruptcy court.

According to Samuel Gerdano, executive director of the American Bankruptcy Institute, there’s a good chance that the bill will go through.

“Economic circumstances have changed for the worse, and by all accounts, they’re going to continue to get worse,” Gerdano said. “The environment is such that politically and economically, the odds have never been better than now.”

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