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Bankruptcy Court Mortgage Modification Explained

Full disclosure: This is not legal, financial or advice as a foreclosure consultant. The following is a description of the home owners stability program found at http://www.financialstability.gov

President Barack Obama’s new foreclosure prevention plan includes the ability to modify mortgages in bankruptcy court for struggling homeowners. 

A court ordered mortgage modification allows judges to reduce home mortgages on primary residences to their fair market value as long as borrowers pay their debts under a court-ordered plan.

Currently, mortgages on principal residences cannot be modified in bankruptcy court. The proposed plan will now allow bankruptcy judges to broadly modify mortgages, just as they can modify and cancel all or parts of other types of debt, including credit cards, auto loans and mortgages for second homes. 

This modification court plan would allow only the part of the mortgage that exceeds the current market value of the property to become unsecured debt in bankruptcy court and thus subject to full cancellation by a judge. So, for a homeowner with a $200,000 loan on a house currently worth $120,000, the judge could cancel $80,000 of the principal. The judge then would work out a payment plan for the homeowner based on the $120,000 balance.

If the homeowner couldn’t handle those revised terms, the lender could take the property back, as in other secured debt workouts in bankruptcy.

Home owners would be required first to specifically ask their lenders or loan servicers for loan modifications; and second, to certify they complied with “reasonable requests” from the lenders or servicers to provide them with “essential information,”. Otherwise, a lender could argue in bankruptcy court that the judge could not proceed with the mortgage modification revision.  

The Obama proposal also would exclude “jumbo” mortgages from any judicial modification relief those loans that exceed the “conforming” loan limits of $730,000.

Priviate mortgage modification companies say the threat of bankruptcy court modified mortgages helps home owners get real results from their lenders. The threat of judges forcing loan modifications on lenders in court would be expensive and time consuming and likely very unfavorable to the lender. Therefor lenders are far more open to working out new terms of the loan BEFORE a struggling home owner has to resort to bankruptcy court.

The Federal Housing Administration (FHA) and the Veteran’s Administration (VA), which both insure billions of dollars in home mortgages would be able to help homeowners with these programs as well.

Other important elements of Obama's Foreclosure Relief Plan

• In the mortgage modification part of the plan, if a lender and homeowner voluntarily work out a lower interest rate on a loan, the rate cannot be cut to below 2% with a government subsidy.
• The plan excludes loans with principal amounts above the current Fannie Mae and Freddie Mac conforming loan limits.  
• The plan will require modified loans to pass a "net present value” test to receive final approval. Once the lender has added in any government subsidies for the borrower and any incentive fees for itself for participating, the total costs of modifying the loan in today's dollars [the net present value] must exceed the cost of going to foreclosure.
• Fannie Mae and Freddie Mac will monitor loan servicers for compliance to the conditions and spending in the plan “so that millionaire homes don’t clog the bankruptcy courts.”
• If a homeowner doesn’t qualify for government help, the government will pay lenders fees to take back the property outside of foreclosing on it, such as agreeing to so-called "short sales" taking a loss on the loan by selling the home for less than the outstanding principal on the loan or taking deeds in lieu of foreclosure.  The documents did not detail fees on non-foreclosure options.

If you do not qualify for a Government based homeowners program and you want to understand what other options are available please provide the details on your situation below and a home foreclosure prevention expert will contact you and answer all your questions.