The House of Representatives has reached agreement on legislation to permit the modification of mortgages for consumers in bankruptcy. The House bill allows bankruptcy judges to modify home mortgages that are on the verge of foreclosure. The legislation would limit the option to modify to subprime mortgages and nontraditional loans that are in foreclosure or are at least 60 days in arrears. The bankrutpcy judges could determine whether a debtor had insufficient income to pay the mortgage and whether a loan modification should be made. The legislation may also permit the bankruptcy judges to reduce the interest rate and extend the term of the mortgage if a foreclosure has been started.
This significant proposed change to the bankrutpcy laws alters the previously untouchable nature of residential mortgages in bankruptcy cases. In many consumer bankrutpcy cases, a home mortgage is the largest debt and it presents the most challenging problem for a consumer seeking to save his or her home. The proposed legislation will give consumers a chance to protect the invement made in their home by providing more options to consumers. Congress was willing to extend these options to consumers because the home mortgage industry has changed over the past several decades from a local bank product to a securitized trust investment promoted by large non-banking mortgage companies.