Judicial Mortgage Modification: Kudos to an advocate for home owners and responsible economic policy.

“No need to lobby me!” At the annual Virginia Democratic Party dinner in Richmond this weekend, I button-holed Rep. “Bobby” Scott, (D-VA), a member of the House Judiciary Committee, about his support for the bill to give home owners in Chapter 13 bankruptcy the right to “modify” — over the objection of lenders — the terms of mortgage loans, including forcing a reduction of the loan to the actual value of the home (known in bankruptcy parlance as a “cram down.”)

Congressman Scott, truly a champion for home owners in distress and a lawmaker who understands we need to the stem the tide of foreclosures piling up inventory, says he already supports the bill. The people who need lobbying now, he says, is the Democratic leadership. The bill was expected to be included in the current economic stimulus package, but was not included fearing opposition from Republicans and mortgage lenders would drag down the larger package.

Mortgage lenders arguments that the change in bankruptcy law would increase mortgage rates for everyone is horse-pucky.

For one, we, as bankruptcy lawyers, are doing “cram downs” now — for example on car loans on vehicles owned more than two and half years — and we have been doing them for years in Maryland and DC. As far as anyone can tell, no one is facing exorbitant car interest rates. If you want a car loan, you can get one (depending on your individual credit standing).

In addition, any relief is likely to be limited and temporary. Some of the features of the bills being considered include limiting the “cram down” to only the seriously toxic loans — negative amortization or interest only. Furthermore the change in the law would be only for a set number of years while the nation gets through this crisis.

Kenneth R. Harney, in his column, “The Nation’s Housing,” in the Washington Post, Sunday, February 7, 2009, has a very good summary and commentary on this issue.

Let’s hope our legislators get some backbone, quit fearing the mortgage lenders who got us into this crisis in the first place, and move real solutions along.

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