Bankruptcy laws: Time for a Change

The more we get into the mortgage cleanup mess, the more it becomes clear that the best place to work out so called “non-performing” mortgages is bankruptcy court.  The way it stands now, people who file in bankruptcy court can get most of their debts adjusted or eliminated, except for student loans with Fannie Mae and residential mortgages (second home and boat mortgages can be adjusted).

Foreclosure is an expensive and time consuming process and the current flap over proper documentation is just one example.  Once a foreclosure goes through, the bank has to sell the house.  To do that they have to maintain it– do the lawn, keep everything working, etc. — and then they have to pay a commission to someone to sell it.  They will never get more than the current market value, and from that they have to deduct legal fees, administration costs, maintenance costs, and marketing costs, including commissions on the sale.    One estimate put these at an average of $75,000 per house.

Now let’s suppose that we allow the bankruptcy court to adjust the principle and interest on the loan to reflect current market conditions.  The owners who have defaulted may be able to afford to stay in the home if the court thinks they can make payments.  The bank will have a new, viable mortgage, based on at least 90% of the current market value of the house, and a current interest rate.  They will be better off than they would be if they foreclosed; and the owners would still have their home.

I call that a win-win.  So why are the banks still fighting it?

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