Rothschild & Ausbrooks, PLLC
Nashville Bankruptcy Attorneys Get A Free Consultation Call 866-656-8909

Should Chapter 13 plans allow mortgage strip-downs?

One of the most troubling aspects of the housing bubble was the way in which it affected home valuations. Because homes were seen as a "can't lose" proposition, banks, other lenders and even those securitizing bundled mortgages cared little for the true value of the property. The transaction was what matter and what generated the incredible salaries of many of these individuals.

This led to the rapid rise of the speculative market and the prevalence of "flippers," who bought homes only to quickly resell them months or even weeks later. If you needed to buy a home during this, however, you were trapped on the illusory escalator, forced to pay whatever the "market" value of the property was at that time.

This is what left so many borrowers underwater when the bubble burst. When all of the speculative "value" drained out of the market, some borrowers were left tens of thousands of dollars underwater. They could not sell, because they would be stuck with deficiency balances that for some could approach $100,000.

At the time the bubble burst, some proposed that these mortgages should be "stripped-down" to their actual market value, in an effort to keep borrowers out of foreclosure. The mortgage bankers screamed, claiming borrowers (?!) would be damaged, because loan origination would be negatively impacted.

A working paper from the Philadelphia Federal Reserve Bank suggests that claim is incorrect. The paper asserts that had Chapter 13 of the Bankruptcy Code been modified to allow borrowers to strip-down their mortgage loan value to the present value of the real estate, it "would not have strong adverse effects on mortgage loan terms and could be a useful new policy tool to reduce foreclosures."

Next week, we will look more closely at this paper.

Housingwire.com, "Philadelphia Fed: Could principal reduction save bankrupt homeowners?" Brena Swanson, December 3, 2014

No Comments

Leave a comment
Comment Information

Contact The Firm For A Free Consultation

Bold labels are required.

Contact Information
disclaimer.

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

close

Privacy Policy

Rothschild & Ausbrooks, PLLC
1222 16th Avenue South, Suite 12
Nashville, TN 37212

Toll Free: 866-656-8909
Phone: 615-866-2265
Fax: 615-242-2003
Nashville Bankruptcy Office