New Legislation Gives Judges Authority to Modify Mortgages

Congress may soon give bankruptcy judges the authority to alter the terms of distressed mortgages in certain cases, making it easier for struggling homeowners to hold onto their homes and property.

The bill was introduced by U.S. Senator Richard Durbin (D-Ill.) during the current lame duck session of Congress. If the bill passes, bankruptcy judges will be permitted to modify mortgage loans by reducing mortgage debt, which in turn would allow bankrupt homeowners to keep their homes.  

Under the terms of the bill, a bankruptcy judge would be able to modify the terms of a mortgage loan after considering such factors as the homeowner's case history, his/her specific circumstances, and the actions taken by lenders and servicers.

Although the bill has received wide support from consumer advocacy groups, banks and financial institutions widely oppose the proposed legislation, despite receiving bailout themselves.

According to Mortgage Bankers Association Chairman David Kittle, allowing judges to modify mortgages would restrict credit and increase cost on all borrowers going forward. Kittle believes that the bill would unintentionally result in more bankruptcies, and an "overall negative impact on individual borrowers, housing recovery, and the economy as a whole."

However, supporters of the legislation insist the bill would "significantly reduce the number of foreclosures and help hundreds of thousands of families stay in their homes."

Although a similar bill was struck down in April of this year, Durbin is confident that the current financial climate and the new administration will increase the chances of the bill passing when the new Congress convenes in January.

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