Will Congress give bankruptcy judges the power to modify the terms of mortgage loans?  Scripps News reports that several bills have been introduced in Congress to do just that.  These bills would limit relief to homeowners who didn't earn enough income to afford mortgage payments, had a subprime or nontraditional loan or faced imminent foreclosure.  Bankruptcy judges would be required to set commercially reasonable interest rates on modified mortgages and not reduce loan balances to less than the market value of the property.

Needless to say, advocates for the mortgage industry are not happy about this prospect.  They envision a situation in which homeowners turn to bankruptcy to rewrite unfavorable mortgage loan terms and they fear a slippery slope in which the mortgage securities market becomes unstable because of a lack of certainty regarding the value of a mortgage backed security.

As a bankruptcy law firm, we see many situations in which the onerous terms of a mortgage note limit the scope of relief that a debtor can obtain.  Further, bankruptcy loan term modifications are commonplace in automobile, furniture, jewelry and other commerical loans, without causing havoc in those industries.

Despite the limited scope of this relief, President Bush has stated that he will not sign any change to the bankruptcy law that would give bankruptcty judges the power to modify mortgage loans.  We will keep an eye on this very controversial topic and report any significant developments.