Home equity loans are, after all, a major part of homeowner debt. The Obama proposal would allow homeowners to wipe out that debt in bankruptcy court,
February 19, 2009

Home equity loans are, after all, a major part of homeowner debt. The Obama proposal would allow homeowners to wipe out that debt in bankruptcy court, allowing homeowners to keep their houses. And of course the credit card industry (those usurious scoundrels!) is screaming.

Gee, that reminds me. Maybe it would be a good time to repeal all those changes in the bankruptcy laws the credit card industry won in the Bush era, too:

A key provision in President Obama's $75 billion foreclosure prevention plan would allow bankruptcy judges to modify home mortgages — a measure supported by bankruptcy attorneys and consumer groups but opposed by lenders.

The American Bankers Association has argued that allowing bankruptcy judges to change the terms of mortgages will increase the risks of mortgage lending at a time the market is already struggling.

The industry isn't unanimous in its opposition. Last month, Sen. Dick Durbin, D-Ill., announced that an agreement had been reached with Citigroup on legislation for bankruptcy mortgage modification.

"If enacted, this legislation would represent an important step forward," Vikram Pandit, chief executive officer at Citigroup, said in a letter to Durbin and three other senators. "Given today's exceptional economic environment, we support its swift passage."

The mortgage restructuring plan, called a mortgage cram-down, would give Chapter 13 bankruptcy judges the power to change loans for a primary residence.

Judges can already modify mortgages for second homes and commercial buildings.

"That's the rule for investors who own two, three and four homes," Obama said Wednesday. "It should be the rule for ordinary homeowners, too, as an alternative to foreclosure."

The change in the law would empower judges to lower interest rates, extend the repayment period, and change the principal amount owed on the mortgage to what is determined as the home's fair market value.

The banking and credit card industry say the proposal is too broad, because it could apply to any borrower, including those who aren't having trouble paying their mortgages.

To protect themselves, lenders want to be allowed to veto any alteration in a home mortgage, says Michael Calhoun, president of the Center for Responsible Lending, a consumer advocacy group.

Don't you love that? "Center for Responsible Lending." Right! Seducing people who are already on the ropes with credit cards so you can charge usurious rates is "responsible lending". But I digress: As it turns out, the Center for Responsible Lending is a group that fights predatory lending. I apologize for the mistake; they sounded like industry advocates from that isolated quote. My bad.

Bankruptcy attorneys argue that such a veto isn't necessary because under the proposed change, the homeowner and the lender would be able to present their case.

Each side could have an appraiser, and the judge would hear the testimony of both sides, including information about the borrower's income and expenses, says Joe Lee, bankruptcy judge for the Eastern District of Kentucky.

Many homeowners have two mortgages because they have taken out a home-equity loan to pay off their credit card debt.

Under the plan, the bankruptcy filing could wipe out the home-equity loan, enabling the family to keep their home, Lee says.

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