September 24, 2008
Response to Mortgage Banker's Association's Position re Modifying Mortgages in Bankruptcy
This has got Georgetown Prof. Adam Levitin's feathers a little ruffled. The Mortgage Bankers Assn claims that if home mortgages can be modified in a bankruptcy case, over the objection of the lender, interest rates will rise and there will be fewer loans. Here is his "very short explanation of why the MBA's claim is patently false and in fact disprovable." Thanks to his Credit Slips posting.
What's this flap all about Alfie? A secured lender's claim can be modified in a chapter 13 or chapter 11. This means the loan can be reduced to the value of the property and the interest rate can be reduced to "a reasonable rate." Right now - today - chapter 11 and chapter 13 debtors can re-write the secured loan UNLESS the loan is secured by the debtor's home (or most newly acquired vehicles). If the debtor could propose a plan which would re-write the loan on his home, the lender would suddenly find reason to talk to the debtor and work this out. When the lender will not talk, the debtor simply walks away and the lender gets the home back in a foreclosure sale - at its then current value obviously - and re-sells it (for which it then re-lends the funds at the then current interest rate). What am I missing here?
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