A mortgage plan…of sorts

Half million dollar house in Salinas, Californ...

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Aren’t they precious?

That’s the only think I can think of when I read about Congress’ plan to help homeowners.

The House is expected to pass the legislation today, and supporters are optimistic that the Senate will follow next month.

For existing mortgages only, the measure would remove an oddity in bankruptcy law: Judges can reduce, or cramdown, the principal on a vacation home, car or boat, but they cannot do it to a mortgage for a primary residence.(LAT)

Well, thank goodness for that, because it’s pretty obvious that only those with boats or 2nd homes are the only ones being impacted negatively during this financial crisis. Baby steps. Their hearts were in the right place. And at least the President understands:

“I just want everybody to understand, that’s the rule for investors who own two, three and four homes,” [Obama] said. “So it should be the rule for folks who just own one home as an alternative to foreclosure.”

The legislation would limit the new bankruptcy rules to existing mortgages. Homeowners would have to seek a voluntary modification from their mortgage holder at least 15 days before filing for bankruptcy. And the bill would require the homeowner to share the profit from a home sale with the lender if it takes place within four years of the bankruptcy. The bank would get 80% of the profit in the first year, 60% in the second, 40% in the third and 20% in the fourth. (from the above linked article)

Sounds interesting, but as the article notes, there’s concern it would push people to declare bankruptcy. Bankruptcy declarations stay on your credit report for 7 years.  Considering the draconian changes the Republican Congress made to the bankruptcy laws a few years ago, I doubt that even if there was a rush, that many would prevail in filing.

Like so much lately, it’s best to adopt a wait-and-see attitude toward this. No one wants to file for bankruptcy and adding on more hurdles will likely turn off others.

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