One of the worst votes the U.S. Senate has made recently was on April 30, when it defeated the bill that would have allowed bankruptcy judges to modify home mortgages to reflect the true value of the home, rather than what that value might have been earlier.
This one vote would have saved more people’s homes from foreclosure, and them from the streets, than any foreclosure protection legislation that has been proposed, and it would have done it without costing a penny of taxpayers’ dollars.
The way it works is this: If you buy an item and finance it, you have entered into a “secured” transaction. That means whoever loaned you the money, or financed your purchase over time, has a security interest in the item purchased, i.e., if you don’t pay, they can come and get it. In other words, the property stands good for the debt.
This is of extreme importance in lending transactions, for people are more inclined to pay a secured indebtedness than an unsecured one, where someone just lends you $100 on your promise to pay.
It assumes even more importance in the event of bankruptcy, where secured creditors can repossess their security if you do not pay them, whereas unsecured creditors have a lower priority and are often left out in the cold. This is an oversimplified example, but it is close enough for government work.
The problem arises when you attempt to determine how much of an indebtedness is truly “secured,” which is coming into play a lot more often under present economic conditions.
For example, if you bought a house for $200,000, paid $20,000 down and signed a mortgage for $180,000, the creditor was owed on a secured basis $180,000. The rub comes when, with a crashing real estate market, the house is now worth only $150,000. (This is what is often referred to as being “upside down” or “under water” in a transaction: You started out “right side up” or “on top of the water,” because the thing you bought was worth more than you owed, but now it is not.)
Should all $180,000 of the indebtedness still be considered secured, even if the creditor after foreclosure could get only $150,000 for the house?
Reason would tell you that this indebtedness is secured only up to the value of the property, and that the remaining $30,000 is unsecured and would very rarely be collected after foreclosure
The legislation our Senate defeated, with the votes of our four senators from Georgia and Alabama, would have changed the bankruptcy law to allow the judge to declare that the creditor was still owed $180,000 in the above example, but only $150,000 was secured and the remaining $30,000 was unsecured
This would reflect reality. And it would also allow that bankruptcy judge to lower the debtor’s monthly payment to an amount which would reflect the real value of the property, and/or reduce the interest rate being charged and/or extend the length of the mortgage, say from 25 to 30 years. The debtor would have a better chance of paying the reduced monthly payment than the higher payment based on the now unrealistic, exaggerated value it originally had. The remaining $30,000 would still be owed the creditor, with a higher probability of being eventually paid, but in the lower priority unsecured claims category.
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