Sponsored by Sen. Richard J. Durbin (D-Ill.) and Rep. Miller, the bankruptcy measure has been the most contentious of the numerous proposals before Congress to address the nation's housing slump and the credit crisis, which originated in a collapse in the market for sub-prime mortgage loans.
Critics contend that thus far congressional proposals for housing market relief tilt sharply in favor of aid to lenders, bankers and even unprofitable home builders. The latter would receive a multibillion-dollar tax break from a provision in the Senate bill allowing them to reclaim federal taxes paid during profitable years dating back to 2004.
The proposal before Congress would allow bankruptcy judges for the first time to modify single-family home mortgages when the appraised value of the home has fallen below the principal balance of the loan.
The excess principal would be declared an unsecured debt -- the category that typically receives the lowest payout in bankruptcy. The remaining balance could be modified by a judge's order to give the homeowner a better chance of keeping up with payments, but the change would have to assure the lender of receiving the full present value of the remaining loan over time.
The proposal would apply to borrowers in Chapter 13, the bankruptcy provision for persons seeking to reorganize their personal debts. In most cases, Chapter 13 requires debtors to pay off their secured debts over three to five years; the proposals in Congress would grant an exception for modified mortgages, which could still extend well beyond that limit.
Although some lenders have offered to work out voluntary modifications with strapped borrowers, subject to strict conditions, "there are a lot of structural barriers to loan modifications, and a voluntary system doesn't do enough to affect them," said Kurt Eggert, a law professor at Chapman University who studies mortgage issues.
Shifting the authority to bankruptcy judges might encourage loan servicers to make modifications by giving each deal the imprimatur of a federal court.
Some supporters contend that the proposal rectifies a glaring inequality in bankruptcy law: Currently, judges can approve modifications on loans secured by "factories, grocery stores, farms, boats, motor vehicles, mobile homes and investment property," as one bankruptcy judge supporting the change observed in a letter to Rep. Linda T. Sanchez (D-Lakewood), a cosponsor of Miller's bill.
In other words, just about everything but a principal residence.
Floyd says she's become well aware of that while waiting long hours in bankruptcy court for her case to be called.
"I've seen the judges change people's car notes," she said. "If they could just freeze my rate, I could pay my note."
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michael.hiltzik@latimes.com
