Solving The Foreclosure Mess: Let’s Get Serious

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Two years ago, the solution to the foreclosure mess generating the most attention, including support from then-Presidential candidate Barack Obama, was a proposal to change our bankruptcy code to allow mortgages on primary residences to be modified in bankruptcy. It even garnered support from a long list of diverse supporters including community groups, legal scholars and  industry players such as Citigroup Inc., and the National Association of Home Builders.

Yet, politics being what they are, here we are two years later and much deeper into the housing crisis, with no better solution on the horizon. The Helping Homeowners Save Their Homes Act of 2009 passed the House was killed in the Senate, where legislators turned their back on hurting homeowners. This morning I heard NPR citing a prediction by Rick Sharga of RealtyTrac that the US housing market is not likely to stabilize until 2014. And in the meantime, a record number of houses will be repossessed next year. Just how many Americans will have to lose their homes, and how much more wealth will have to be drained from those who continue to stay in their homes, before we come to a real solution?

It’s time to get back to basics and reconsider judicial modification of mortgages as a way to stabilize this dying patient before she bleeds out on the table.

A quick background: For decades, bankruptcy courts have been the place where individuals, families, and businesses large and small get a second chance. Income and assets are scrutinized by bankruptcy lawyers, trustees and judges. When it’s determined that there is enough money to pay at least some creditors, payment plans are made. When there is not enough to go around, some or all debts are discharged. The process is not easy or painless, yet it is effective. In fact, our bankruptcy code is credited with contributing to one of the most robust small business start-up climates in the world.

Yet there is one Mack-Truck-size pothole standing in the way of the American homeowner who wants to hang onto his or her home. One report [pdf] describes it as an “anomaly in the 1978 Bankruptcy Code, which singles out home mortgage lenders for special protection and makes the home mortgage on the primary residence virtually the only debt the court cannot modify and the home the only asset it cannot protect.” Even then, home mortgages were commonly restructured in bankruptcy until a 1993 Supreme Court decision essentially put an end to the practice.

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  • Mike Clover

    Good Article Gerri…the reality of what is going on out here is frightening…I hear all the stories from people that go through the loan modification process and still foreclose on their homes. There are so many Americans losing thier jobs…. How in the world can we recover if job creation is not taking place? I am not sure if the goverment can resolve this mess….We need a back to the basics attitude, where we have 6 months savings in the bank for tough times, and avoid buying stuff we dont need. We have really been spoiled over the last 20 years. Maybe this market is a wakeup call for all of us. I consult with my 87 year old granfather who is part of the Greatest Generation, and he claims we are in big trouble…. I hope he is wrong….

  • Cherif Medawar

    What the government can do is remove all the red tape created around starting or running a business. If the government plays a supporting role for businesses including start ups the employment figures will improve and market will start stabilizing.
    A second thing the government can do is force people on unemployment to learn new skills and offer trainings and classes for free so people can evolve their skills and employed again.
    Market will not truly receive till 2015 in my opinion and we will have a boom from 2015 till 2022. They are printing so many billions everyday there will be a sudden reversal in 2015.
    In the mean time foreclose, foreclose foreclose.

  • JohnnKC

    I really don’t think that you’d have to force people on unemployment to learn new skills that are marketable. It’s just that some who is laid off in Joplin, MO or Flint, MI who owns a home that is underwater and can’t sell might not be able find a job even after they learn a new skill in their home town and won’t be able to move to another location because they can’t sell their home or they won’t want to leave their spouse and/or children to do so. These knee jerk responses just aren’t thought out.

    And it’s going to be difficult for many older people with new skills who are laid off to compete with the younger workers. And don’t forget they want to raise the retirment age for Social Security. Can’t you see your 65 year old mother out their competing for a waitress job at Hooters.

    I’ve had thirty and forty year old guys knocking on my door during the summer asking if I needed my lawn mowed and this winter asking if I needed my snow shoveled. If I were fully employed and didn’t need to save every dime I had I would have loved to give them an opportunity to earn some money to make a car payment.

    And you know employers wont’ want to hire older employees because the cost of health inusance benefits will be much higher. And what supervisor is going to want to hire someone who is twenty years older and has twenty years more of work experience.

    And then, the same complainer who wants everyone who is drawing an unemployement check to me taught new skills. That means there will be another governemnt program we’ll have to fund. That will give you one more thing to complain about.

    Let’s get down to basics. If there is a lack of trained workers, let’s keep government out it. We don’t want them to subsidize someone’s business by having the government pay for the training of their employees. Let the companies train their own employees. There we go again, business is looking for another hand out from the government.

    By the way, I’d like to know how many businesses out there can’t find skilled employees. Does anyone have any statistics on that? What per centage of those workers who are now unemployed aren’t sklilled? I know skilled carpenters in their sixties who had their own business and had ten or more employees working for them. They can’t find a job.

    I suspect that the majority of unemployed workers do not like living with the uncertainty of living on unemployment benefits.

  • Lisa

    I know of a “homeowner” who has filed chapter 13 and signed paperwork so that the mortgage company can take the home — proceed with foreclosure?

    The mortgage has not been paid for almost one and one-half years and the house has been empty — having been abandoned by is now x-wife who had possession and control of the premises since their separation.

    Unfortunately, to this day the mortgage company has done nothing to take control of the premises. It is sitting empty and the locality is hounding the the former homeowner for payment of refuse bills — even though no services are needed at the vacant dwelling.
    The former homeowner is in gridlock — they cannot arrange for a sell or short-sell of the premises. How do they get out of this mess — get the mortgage company to move on this home.

    • Gerri

      I wish I had an answer for your friend. This is a problem that is happening in many places. He does need to make sure he takes care of bills that may have to be paid. For example, in some locations you need to make sure you are taking care of homeowner dues or keep a house up to code. He’ll need to talk with his attorney for advice.

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