There is a lot of buzz going around right now regarding the new bankruptcy legislation. If you have not heard, this legislation is set to allow bankruptcy judges the authority to modify loans on primary residences. While the banking industry is opposed to this legislation, I don't see any way it does not get put into effect.
This bankruptcy legislation is referred to as a "cram down" by the banking industry, but truly it will help to stabalize the real estate markets. Currently homeowners are at their lenders mercy when seeking a loan modification. From my experiences and conversations, the lenders are not easy to work with, and are very reluctant to offer a true modification.
What's more, the modifications that are being offered are more like band aids, short term fixes. Without long term fixes, there is certain to be more foreclosures on the way.
This next wave of foreclosures, however, will be different than the first. So far we have seen people who could not afford to make their payments, people who maybe should not have owned a home. We have also seen the adjustable loans and option arm/neg-am loans that have reset to much much higher payments that are not affordable. This new wave of foreclosures, however, is people making business decisions to walk away from their homes.
When homeowners make a business decision to walk away from their home, it produces a foreclosure that is not on anyones radar. These are people who do have jobs, good credit and the income to make payments on their homes. The business decision, however, comes when they owe more than their home is worth, or maybe they have a long term adjustable loan that the bank will not renegotiate. This wave of foreclosures is the wave that can be prevented with the new bankruptcy legislation.
By allowing bankruptcy judges to adjust the principal balance of a loan, and adjust the payment, it forces the idea of a loan modification to work. It may not be the best solution, but we are in a terrible mess right now, and the only way out is to slow the foreclosures. This legislation has the potential to do just that.
I work with hard money lenders, and talk with people in all types of situations every day. I truly believe that something of this nature is needed.
Check back in, I will be looking at the legislation in more detail as it takes shape!
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