President Bush announced his plan to mitigate the mortgage foreclosure crisis this week, but the loosening of FHA restrictions will provide relief to only a small percentage of those facing foreclosure.
The plan is far less aggressive than those recently proposed by various Democrats. Amid warring propositions to combat the wave of foreclosures sweeping the country, Senator Richard Durbin (D-IL) has announced that he will propose legislation to alter the treatment of home loans in bankruptcy.
No details of Durbin's proposal, the "Helping Families Avoid Foreclosure Act", have been released.
However, it seems likely that the proposed legislation would correct an inconsistency in the existing bankruptcy law that makes home loans virtually the only secured debt not eligible for restructuring in a Chapter 13 repayment plan.
Corporations with loans secured by real estate can restructure those loans in bankruptcy, and individuals can restructure other secured debt like automobile loans, but a provision in the current bankruptcy code specifically excludes home loans from that process.
The current provision wasn't part of the most recent bankruptcy reform, but dates back to 1978.
When the provision was enacted in 1978, most home buyers put down a 20 percent downpayment, and the typical mortgage loan was for 20 years at a fixed interest rate. The exotic subprime loans with adjustable rates, interest-only payments, balloon payments, and 50-year terms were virtually non-existent.
Now, however, an increasing number of homeowners are driven into filing bankruptcy when they are unable to adapt to rising interest rates on their ARMs or to meet balloon payments.
The lack of equity in many homes purchased on non-traditional terms has aggravated the problem by making refinancing difficult or impossible for many homeowners. For the same reason, many homeowners no longer have home equity available to cover unexpected expenses like uninsured medical bills.
Bankruptcy reform that allowed homeowners to make reasonable payments on those loans in a Chapter 13 bankruptcy plan would benefit both homeowners and lenders by allowing residents to remain in their homes while ensuring lenders a more significant payback than most can expect in a foreclosure action.