Bills Would Allow Bankruptcy Judges to Modify Home Loans

Legislation pending in Congress would allow bankruptcy judges to help stave off foreclosures on primary homes by adjusting the mortgage terms and even forgiving part of the debt.

The bills would allow judges to reduce the principal debt to the property’s fair market value, lower the mortgage interest rate, or give the homeowner more time to pay, the Washington Post reports.

Lenders oppose the legislation, saying it will cause them to offset the increased risks of losses by charging higher interest rates and refusing riskier borrowers.

Bankruptcy lawyer William Brewer disagreed, telling the newspaper that troubled loans are a small percentage of all mortgages.

Law professor Mark Scarberry of Pepperdine University School of Law opposes proposed stripdown provisions. He told the National Law Journal that borrowers could file bankruptcy and get their principal reduced when the market is down, then profit when the property appreciates.