The foreclosure-prevention plan announced by President Barack Obama comes with incentives for lenders to ease mortgage payments for struggling borrowers — but also with a cudgel: If the mortgage industry doesn’t modify loans, bankruptcy judges may cut payments more sharply.
The president on Wednesday confirmed his support for legislation that would allow federal bankruptcy judges to reduce, or “cram down,” mortgage loan balances on the primary residences of people who file for bankruptcy protection. At present, bankruptcy judges can reduce or wipe out other types of debt for consumers who file for bankruptcy protection, but not mortgage debt for a primary residence.
Proponents of the legislation say it is too early to tell whether mortgage rates will go up and, in any event, banks helped to create the current mortgage crisis. Rep. John Conyers Jr., a Michigan Democrat who has sponsored cram-down legislation, has argued that banks haven’t been able to move fast enough to stem the foreclosure crisis. “It is high time the Congress decisively addressed this destructive practice” of foreclosure, he said in a news release this week.
Source: wsj.com
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