Mortgage Cram-Down Bankruptcy Legislation Passes in House

By Bill Rice

According to reports from the Congressional Budget Office this law will help 1 million homeowners remain in their homes. The proposed law would give Federal judges the authority to modify mortgage contracts by lengthening terms, cutting mortgage rates, or reducing loan balances. It would also permanently increase the Federal Deposit Insurance Corporation (FDIC) coverage of deposits to $250,000.

Although this law would arguably give judge more tools to help consumers recover from crushing debt, it will continue to apply pressure to banks and housing prices.

The bill stalled in the House earlier this week amid significant opposition from the banking industry. Industry groups, like the American Banker, claim that this legislation will just further destabilize housing prices. There was also concern with the earlier version of the bill being too attractive; therefore, ceasing to be a true "last resort."

As a result, the House tightened the legislation with the provisions such as a equity share that would be paid back to the bank if the property was sold later at a profit.

Experts believe that this will significantly increase Chapter 13 bankruptcy filings. Chapter 13 bankruptcy code allows individuals with regular income to pay all or a portion of their debts and avoid losing their homes in foreclosure.

Friday jobless numbers that continue to climb give us reason to believe that this bankruptcy provision is likely to get a lot of exercise, if passed. February jobless claims reported another 651,000 jobs lost. This raises the unemployment rate to 8.1 percent from 7.6 percent in January, the highest level since 1983. Total job loss since the recession began in December 2007 reaches 4.4 million.