MORTGAGE LOAN COMPLIANCE®

Chapter 13 bankruptcies are available only if the debt­or’s unsecured debt is less than $336,900 and secured debt is less than $1,010,650. Chapter 13 thus is unavailable to people who took out large loans to purchase homes in particularly expensive areas.

“Here in LA, home prices were so high, many buyers can’t file for Chapter 13,” notes Peter A. David­son, a partner at Ervin Cohen & Jessup in Beverly Hills.

Some people might instead file under Chapter 11, which also allows debtors to repay creditors over time. But filing under Chapter 11 can be prohibitively expensive for most people. "The debtor needs to do a lot of reporting, negotiate with creditors—sometimes a creditors’ committee—and must pay for all the professionals employed by the creditors, including accountants and legal counsel,” Davidson says.

Yet even Chapter 11 does not allow modifications on the first mortgage for a primary residence. Many experts assert there is a good reason why loans on primary residences—unlike other secured loans—may not be modified in bankruptcy.

“Homes are unique,” says Alan Schwartz, a professor at Yale Law School and the School of Manage­ment in New Haven, Conn. “Con­gress deliberately created this exception to boost home ownership. Congress found that if a bankruptcy court couldn’t ‘strip down’ home loans, the interest rates for those loans would be lower.”

But there is heated debate about what would happen to interest rates if Congress did allow mortgages to be stripped down in bankruptcy proceedings.

The Mortgage Bankers Associa­tion estimates that mortgage interest rates would jump at least 1.5 percent and predicts that lenders also would require larger down payments and impose higher closing fees to counterbalance the risk that bankruptcy courts would reduce the amounts that borrowers must pay on mortgages. The MBA—echoing chairman Kittle’s testimony before the House Judiciary subcommittee—warns that those higher costs would push home ownership beyond the financial reach of millions of families.

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Mortgage Loan Compliance

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