Why Hasn’t Obama Supported Judicial Modification?

Modification of home loans in bankruptcy was promised by candidate Obama before his election as President.  Current bankruptcy law prohibits modification of a loan secured against the debtor's principal residence.  The idea was simple, if bankruptcy judges were allowed to adjust the balance due and payment terms of home loans in Chapter 13 cases, many homeowners facing foreclosure would be able to keep their homes.  The loan terms would become more affordable and the default leading to foreclosure would be eliminated.

Instead of judicial modification, the Obama administration created a different program.  HAMP, the Obama solution, is a voluntary program by which certain home loans can be modified if the lender agrees to do so.  The HAMP program is a failure.  Few loans are being modified and the modifications that are approved often result in a second default.  The program has been costly for lenders to administer and of little help to home owners.

Judicial modification of home loans by bankruptcy judges would cost the government no money.  It would allow an experienced judge to value the home and establish a payment schedule that would be affordable to the home owner.  Since the lender would receive at least the same amount of money it would recover from a foreclosure sale, it would take no loss. 

The HAMP program is costly.  It is subsidized with government money.  It requires a great deal of administration by the loan servicers.  Taxpayers are required to pay incentives to the borrower and the loan servicer if a modification is successful.  Of course, if few are successful, the cost in taxpayer funds is low.

Bankruptcy modification of home loans has been proposed in congress by advocates of judicial modification twice since President Obama was elected.  The bills received no help from the Obama administration and were not enacted.  Why has Obama chosen not to honor his promise to support this needed change to the bankruptcy law?

The current home finance system is a cash cow for large investment banks.  These giant financial institutions rely on sale of securities backed by home mortgages for much of their outrageous profit.  Big banks and their highly compensated executives have used their vast wealth to lobby against change.  If foreclosures stopped or were greatly reduced, there would be fewer new mortgages to package and sell.  In turn, there would be fewer multi-million dollar bonuses paid.

by Kent Anderson, Oregon Bankruptcy Attorney · Posted in *Chapter 13 Bankruptcy