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Legislation could ease foreclosures

Judges could cut the mortgage interest rate, lengthen loans or forgive part of the debt.

By The Washington Post
Published November 21, 2007


WASHINGTON - Congress is considering legislation that would allow bankruptcy court judges to rewrite loan terms for people at risk of losing their homes, a change that supporters say could save half a million borrowers from foreclosure through early 2009.

Under this plan, judges could lower the interest rate of a mortgage on a primary home, extend the life of the loan or forgive part of the debt - as they currently can for vacation homes, farms and investment properties. Doing so could reduce by a quarter the 2-million foreclosures expected in the next 18 months, according to Moody's

Of all the legislative proposals aimed at helping at-risk borrowers, this one is thought by consumer advocates to offer the most wide-reaching and immediate relief. The House has held two hearings on a bill introduced by Reps. Brad Miller, D-N.C., and Linda Sanchez, D-Calif. Similar legislation has been offered in the Senate.

Pressure for action is building as the number of foreclosures mounts. Some advocates say courts should step in because lenders are not moving decisively enough. But lenders say the legislation would increase mortgage costs for borrowers and encourage some to use the courts as a cheap alternative to refinancing, causing bankruptcy filings to spike.

At issue are Chapter 13 personal bankruptcies, which immediately halt foreclosure sales and freeze all collection actions for debts that predated the filing.

The court then approves a repayment plan that determines which creditors get paid and when.

Under this arrangement, a person has three to five years to make missed mortgage payments.

But while trying to make good on past debt, filers must keep up with their regular mortgage payments and other expenses.

These days, that may not make financial sense because so many people are upside down on their mortgages, meaning they owe more on the home than it is worth.

To help those borrowers, the bill would allow judges to reduce the principal of the loan to the home's "fair market value." The rest would be treated as unsecured debt, and the borrower could end up paying little or none of it.

[Last modified November 20, 2007, 23:09:31]

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