Activists Want Congress to Change Bankruptcy Laws Dealing With Mortgages

Kristen Baker and her husband bought an 8 room house in Litchfield 6 years ago.

But a few years later, they refinanced their traditional fixed rate mortagage at a cheaper rate to save money.

Baker says she and her husband were shocked to find that the mortgage they got was far different from what they thought they were getting.

The only payment we were ever told about is now called the ‘minimum payment’. So we were blown away and we didn’t know what ‘minimum payment’ meant. Well, minimum payment now means negative amortization if you don’t pay the full amount. Well the full amount was way too high for us to pay.

That negative amortization meant that whatever the Bakers didn’t pay in interest was tacked onto the principle.

And that made the value of their loan more than their house is worth.

Families like the Bakers can file for Chapter 13 Bankruptcy and get a judge to rework the terms of their loans.

But in the end, the homeowner will still have the pay what’s left of the original loan plus any arrearages.

Attorney Peter Wright at Franklin Pierce Law School says that’s usually not very helpful.

If the homeowner had trouble making the loan payment before they went into bankruptcy, it’s very difficult, if not impossible for them to make the catch up payments on top of their regular mortgage payments going forward.

Wright is one of many activists around the country pressing Congress to change Bankruptcy laws.

He thinks judges should have more latitude to alter the terms of an onerous mortgage.

He says judges already have that authority for 2nd homes, expensive cars, and many other personal assets.

Those loans can all be modified today. There was just an exception carved out for the primary residence, which means for most borrowers their home. And the change that we seek to have in the law would remedy that and provide equal treatment to the primary residents.

Mortgage bankers around the country oppose any changes

The head of the New Hampshire Bankers Association says he thinks they could have a real chilling effect on the state’s mortgage market.

President Jerry Little says if a judge can lower a mortgage, banks are going to take fewer chances on whom they lend to.

In its current form, within effective limits the Bankruptcy modification would actually probably extend the amount of time it will take us to recover by making it much more difficult for lenders to extend credit, make it harder for people to get mortgages to buy homes. So it could slow down things as we try to work our way out of the recession.

The chief of the Mortgage Bankers and Brokers group of New Hampshire also says changing the Bankruptcy law could be bad for the economy.

In fact, Ralph Coppola says the massive market on Wall Street that buys and sells mortgages wants to know exactly what they’re worth.

Coppola says the change could end up spooking investors who buy and hold mortgage securities.

That’s going to be added risk and its going to make the securities and the mortgages that have been securitized less attractive to investors. They will yield less to the investor, so it will definitely drive up interest rates. Its just the way the markets work.

The Center for Responsible Lending , a housing activist group, estimates there could be as many as 25, 000 foreclosures in New Hampshire over the next 4 years.

Activists say perhaps ten percent of them could be helped by a change in bankruptcy law.

President Obama has said he’s behind making changes.

It is now up to the House and Senate to determine whether the President gets the chance to sign the bill into law.