By JODI SOKOLOWSKI
Buffalo Law Journal

A proposed amendment to the U.S. Bankruptcy Code would help consumers save their homes from foreclosure by reducing their mortgage loan to the current value of the property.

"It certainly will not be a panacea for everyone facing foreclosure," said Allen Fishbein, director of housing and credit policy at the Consumer Federation of America.

Moody's Investors Service, he reports, has estimated that about 570,000 homeowners could be helped if the legislation passes.

"About 25 percent of all homeowners that are being affected by foreclosure could be aided by this change," he said.

The Helping Families Save Their Home in Bankruptcy bill, part of the Foreclosure Prevention Act of 2008, S.2636, would permit bankruptcy judges to modify mortgages for owner-occupied primary residences in a Chapter 13 filing.

"It may make Chapter 13 a more attractive mechanism to deal with mortgage problems," said Hon. Carl Bucki of U.S. Bankruptcy Court for the Western District of New York.

The amendment would expand a current law that allows for loan reductions on investment real estate, farms, vacation homes, automobiles and boats.

"In order to encourage cheap lending for primary homes, Congress exempted primary homes," explained John Mechem, spokesman for the Mortgage Bankers Association of America. "It's all about trying to keep credit inexpensive for the purchase of primary homes."

Since inexpensive lending made it attractive for homeowners to purchase loans above their means, many homeowners are now facing foreclosure or bankruptcy because they can't afford interest-rate hikes on adjustable-rate mortgages.

This proposal is just one of several solutions being presented in response to the subprime-mortgage crisis.

"This is the single most productive way of addressing the problems of homeowners," Fishbein said.

For and against

The package, now pending in both houses of Congress, is expected to get support from both sides of the aisle, Fishbein said.

"If looking to weathervanes, the foreclosure crisis appears to be serious enough and national in scope that I think members of both sides of the aisle will be hard-pressed not to support it," he said.

However, some mortgage and banking-industry representatives are lobbying against the package, claiming that the mortgage reductions for some will increase mortgage costs for all others.

"Lenders will be forced to price that new risk into the cost of all new loans. We think it's going to make mortgages more expensive for all consumers," said Mechem, of the Mortgage Bankers Association of America.

The provision may encourage more consumer bankruptcies, which sets a "dangerous precedent," Mechem warns.

"It's a huge black mark on consumer credit and prevents them from buying a home for the next 10 years," he said.

However, some consumers have no choice but to file for bankruptcy, consumer advocates said. This will help them to not only stay in their homes but will allow mortgage holders to continue to collect on those mortgages, although in an amount that's lower than the original loan value.

"Rather than banks having to start the foreclosure process and wind up with a nonperforming loan or end up with an asset that is not worth the value of the loan, why not work something out and make some kind of return on the investment?" asked Kathleen Lynch, a staff attorney at the Western New York Law Center. "It's better for the community, better for the borrower and, in the long run, better for the lender."

The amendment might hold steady the already-high number of foreclosed and vacant properties, therefore maintaining neighborhood property values, believes Lynch, a member of the City of Buffalo Anti-Flipping Task Force.

"We already have an abundance in housing stock. We can't afford to have any more borrowers leaving their homes," she said.