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Is Bankruptcy Mortgage Modification Back?

posted by Bob Lawless

As I write this, the Senate Judiciary Committee's Subcommittee on Administrative Oversight and Courts is holding a hearing entitled, "The Worsening Foreclosure Crisis: Is It Time to Reconsider Bankruptcy Reform." The witnesses include Credit Slips's own Adam Levitin.

After the Senate failed to support changing the Bankruptcy Code to allow judges to do mortgage modifications, it appeared to be a dead issue. The hearing is great news and hopefully an indication there may be some interest in moving the legislation forward. There have been increasing reports (e.g., here) recently that lenders are not doing voluntary mortgage modifications in the numbers that need to happen. Yeah, I know -- who could have possibly foreseen the possibility that a solely voluntary system would not work? There need to be carrots that encourage lenders to do the modifications. The change in the bankruptcy law is the missing piece -- the stick that makes the program work.


I sincerely hope there is a serious reconsideration of judicial modification in bankruptcy. Without it, consumers have no leverage at all, they continue to be at the mercy of the financial services industry.

Looking to the servicers to "fix" the problem that they, their clients and their affiliated companies created makes no sense and will not work. The thought that paying them to do it makes it worth their while is just plain wrong.

The government has told the financial services industry that it "expects" them to utilize the HAMP program, and has linked their cooperation to obtaining bailout money, so they are going through the motions - for show. There may even be a few borrowers here and there who will "luck out" and get into it, so that the servicers can hold them up as examples of "how hard we are working with borrowers to help them". However, those are not the norm. What is the norm is rejections, refusals to take the applications, and "bait and switch", where the borrowers are instead steered into programs that have far worse terms, and where they are required to waive their legal rights and defenses in order to participate. Then the industry can proclaim that the "redefault rate" is too high, as though somehow it is the borrowers' fault that the only modification they could beg from the servicer was one on terrible terms.

Even if the servicers wanted to do HAMP modifications, which they do not, any successful program would entail a massive retooling, hiring many new people, and developing a process to bring this off. That would involve a substantial expense which is likely to equal or exceed the "incentives" paid to them by the Treasury under HAMP, thereby cancelling out any significant positive revenue to them. The process that results in their charging junk fees, late fees and other charges to the loans already exists, so costs them nothing to continue. It is a simple math exercise to see which benefits them more.

I defend these cases. I have the evidence in my files of the many clients who qualify for the program, who have BEGGED their servicer to consider them for the program, and yet receive no response - or worse. One case in particular comes to mind where the people clearly qualify, the servicer is a Wells Fargo entity who has signed on to do HAMP, and yet not only to they refuse to allow them to apply, they have hired a high-priced law firm to try to PREVENT these people from getting into the HAMP program, which would enable them to save their home.

Putting the servicers in charge of resolving the mortgage meltdown is putting the fox in charge of the henhouse.

I so agree with Margery. I have seen a marginal increase in Mortgage Mods, some in bankruptcy but its not nearly as heavy as it should be. Something the blogs and bloggers on creditslips have consistently warned about. It seems as though the Mortgage Servicing Industry holds the purse strings..

Although we are gainfully employed at half the salary we made two years ago, we have been unable to get our lender to modify. We are denied continuously with absolutly no explanation after asking continually for one. We put down over 20% on our home and therefore stand to lose a great deal of money. It has put us in a very bad position because the lender is refusing to modify and if we are forced to sell our home, which is currently 200K underwater, we not only lose our 20% in cash that we put down, we stand to still owe the additional 200K. Because the foreclosures keep happening, our home values have been robbed, we can't get our lender to modify to decent terms and we are earning income. This is beyond ridiculous and something needs to be done fast. When the lenders are foreclosing on employed people who can make a modified mortgage payment, when the NPV numbers make sense to do the modification, it is time for the courts to be able to step in and make the modification happen for them.

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless ([email protected]) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.