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Legislation to allow bankruptcy judges to rewrite the terms of mortgages is being considered again in Washington.  Senate House Financial Services Chairman, Barney Frank (D., Mass.), is planning on attached such a bill to a financial regulatory overhaul scheduled to be introduced later this year or early in 2010.  Such legislation passed the House last spring, but was shut down in the Senate.

Such legislation will mean that a homeowner, seriously behind in her house payments, could seek refuge in a Chapter 13 bankruptcy and apply to the judge to have her mortgage “re-written.”  This could, depending on the specifics of each case, allow a reduction in principal to be paid, lower the interest rate on the loan and extend the term of repayment.

Curiously enough, Mr. Frank notes that the best chance to have new bankruptcy legislation passed is because the mortgage servicers are doing such a lousy job of the voluntary mortgage modification programs.

We need this legislation.  The voluntary modification programs have helped some, but not nearly enough, home-owners.   And then, only after many months of frustration.  Having an unbiased Bankruptcy Judge to mediate the process and structure a new home loan to help the home-owner will save thousands, if not tens of thousands, of homes from foreclosure!

The flurry of advertisements on the TV promoting people who promise loan modifications suggests that modifications are available if you just know how to do it right.

My experiences suggest that it isn’t so.  If there is a theme I hear in talking with clients who’ve sought loan modifications is that they can never get through on the phone and that paperwork submitted to lenders seems to be sucked into a black hole.  Again and again, they are told they haven’t provided the requested information or that what they’ve provided isn’t right.

Meanwhile, all kinds of folks offer to help homeowners with the process, for money up front.  Given the apparent success rate of getting modifications, they’d better get their money up front, because they are unlikely to produce a result deserving of compensation.

Word from Capitol Hill is that judicially supervised loan modification may reappear in the financial services bill to be introduced this fall.  Let’s hope that Congress can learn that voluntarism, in the context of mortgage modification, isn’t doing the job.

One of my clients actually was offered a loan modification, or rather a trial period in which he could send the lender money, after which they would consider offering him a modification.

I was to fax it to the lender after we had discussed the risks and rewards.  The offer, now signed by the client, had the fax number for the return of the agreement and a deadline of August 1.

I tried twice July 31 to fax it, and the fax machine on the lender’s end did not respond.  I tried twice on August 1:  same story;  I tried again on August 3rd, clearly now within business hours on the East Coast. No response.

My paraglegal had to call and get an alternative number to even get the client’s acceptance in the hands of the lender.  It doesn’t raise my confidence level about what’s going on at the lender’s end of this deal.

Nearly 3 million homeowners are eligible for the government sponsored loan modifications;  only 400,000 received a loan modification offer over the life of the  government program.

In the meantime, 1.5 million homeowners got a foreclosure notice in the first half of this year.

Lenders at the top of the list for percentage of eligible loans modified include Saxon Mortgage, JPMorgan Chase, GMAC and Auroa; each modified more than 20% of eligible loans.

Bank of America, Select Portfolio, Ocwen and Wachovia modified five percent or less, according to an AP story in the San Jose Mercury.

My clients listen to the ads on radio and TV and think that modifications are widely available and actually happening. That isn’t my experience.  This report suggests that a lot depends on who is servicing the loan at this point.

We need to revisit judicially supervised loan modification before it gets any later.

National real estate columnist Kenneth Harney wrote about the decision to default on affordable  mortgage payments when the loan is larger than the value of the home.  Is default a viable strategy?

What grabbed me was not the ethical question, but the factoid that homes purchased in 2006 in Salinas are on average $214,000 underwater!  Those houses need to appreciate almost a quarter of million dollars before the homeowner has a dollar of equity.  How long do you think that level of price growth would take?

My role as a bankruptcy attorney is often to ask the uncomfortable question.  Why do you want to continue paying on a loan that is hopelessly more than the value of the property?   What economic principle says that financially smart to continue to overpay?  What are the prospect for mobility for the family who cannot sell their house for as much as they owe?

So, the issue of modifying mortgages has a far wider application than the bank supporters suggested.  It’s not just people  who “bought too much house”, it’s the people who lived next door to the people who bought too much house. The housing crash affects a wide swath of new homebuyers.

It’s easy for the older generation to sit in judgment.

Modifications are down in the second quarter of this year, and foreclosures are on the rise, reports New York Times reporter Gretchen Morgenson in a piece entitled So Many Foreclosures, So Little Logic.

My experience in the San Francisco Bay Area is consistent with the theme that modification are few and the degree of change in the troubled mortgage is limited.  Seldom is the principal reduced to reflect today’s value.

But the figure that caught my eye was this:  banks who foreclosed lost  an average of 65% of the loan balance! The figures come from a study by Valparaiso University professor Alan While of some 3.5 million subprime and alt-A home loans managed by Wells Fargo Bank.

You have to ask why those managing these loans think that modifying the loan will incur an unacceptable loss for the note holder.  The loss could hardly be greater than 64%.

Who will hold those making these decisions accountable for the loss imposed on the note holder?  And the cost to the country as  a culture of home ownership is shredded is incalcuable.

Morgenson expects that ultimately the taxpayers will have to pick up the cost, but only after families have lost their homes.

I actually met a client yesterday who had negotiated the modification of her loan .  Interest rate reduced to 2% for 2 years; 4% for 2 years; and 6% thereafter.  Arrearages added to principal.

If that’s all you knew you might think that lenders were serious about making modification work.  The remaining fact is that the client now has an $839,000 debt on a house now worth $575,000.

The modification did nothing to make it economically rational to keep paying on this loan.  The house must gain a quarter of a million dollars in value before the house could be sold simply to pay off the mortgage.  The payments go up and, for reasons personal to this client, her income is unlikely to increase at the same rate.

So, in my cynical view, all the lender had done here is postpone the train wreck  for a couple of years, perhaps when the market isn’t so depressed with a flood of foreclosures.  And in the meantime, it can congratulate itself on its “successful” loan modification program.  Or, when this deal craters, it can say that modifications are doomed anyway.

Certainly, superficial loan modifications are doomed.  That I will agree with.

Does the Obama Administration read the New York Times?  Then perhaps today’s paper will point out that voluntary loan modification isn’t working. Papers lost, hours on hold, arbitrary denials, the litany goes on.  The Administration can’t tell us how many loans have been modified.

The mere existence of a “program” such as the Times shows in action gets lenders a pass on the extended period for California foreclosures. Yet you have to think a “program” that can’t even track the applications, much less consider them is only window dressing.

Changes to bankruptcy law to allow the modification of home mortgages through Chapter 13 were defeated in Congress this spring.  Opponents  touted the sanctity of contract.  Banking interests  (who made the crisis possible with rotten lending practices) promised to voluntarily help the “deserving”, with sweeteners from the Obama HAMP and HARP plans.

Economists tell us that the recession won’t end til the housing market stabilizes.  Santa Clara County experiences 67 new foreclosure proceedings a day.

Voluntarism, a marvelous thing in the life of our communities, isn’t cutting it in staunching the torrent of housing loss.  It remains time for judicial mortgage modification.

The Mercury News’ story on community resources in the South Bay for those facing foreclosure was wrapped in the tale of a woman worn out by two years of counseling those at risk of losing their homes.

Congress and, to some degree the press, has moved on from the foreclosure crisis, while the statistics report that something like 12% of the home mortgages in the US are behind at least one payment.  Those in the trenches know that there seems no end in sight and voluntary loan modification programs aren’t in place or yet effective.

Bay Area organizations offering free assistance to those facing foreclosure include:

• Project Sentinel  408 720 9888 press 3
• Neighborhood Housing Services   408 279 2600
• SurePath Financial Services  1 800 540 2227
• EPA Can Do  650 473 9838
• San Jose Foreclosure Help Center  408 794 1241

If you know of other free services, please add your comments.

The Obama administration has announced “enhancements” to its housing program that will make it easier for a homeowner to lose their home via short sale. Huh?

If this is part of a home retention program, I don’t get it.  A short sale nets no money for the seller.  It simply allows a buyer to get clear title to the property even when the existing lenders get less than they are owed.

The Obama program will also try to make it easier for homeowners to deed their properties to the lender without the necessity of a foreclosure.

It makes little difference to the former homeowner whether the mechanism of home loss is foreclosure, short sale, or deed in lieu.  The home is gone, and the family may be sliding out of the middle class.  I spend lots of time pointing out to those on the brink of losing their homes that living there payment free til the foreclosure may be the only return they will get on their investment.

The cynic in me wonders whether this program is simply another attempt to bolster the bankers, rather than the home owners.