Hal's Mortgage Blog

Congress is considering giving judges the power to discharge mortgage debt in Chapter 13 bankruptcy and rewrite payment terms. This is commonly known as a "strip-down". Sounds like a good idea, right?

Here are some facts to consider:

• Many Chapter 13 bankruptcies fail - filer never obtains a discharge of his debts.
• 20% fail before the court confirms filer's plan.
• Another 55% fail between confirmation and discharge because the filer is unable to make his payments
• Nearly one-third go on to file bankruptcy again.
• Attorney fees of $2500-$5000 could double as strip-downs are more complex and take more time.
• Less than 5% of homeowners are more than 60 days behind on their mortgages - the usual measure of delinquency.
• Strip-down would be available to 50 million homeowners who are current on their mortgages if they filed bankruptcy.

Some of the unintended consequences:

• To protect themselves from future strip-downs, lenders would have to demand increased down payments. Most likely 20 - 30% - that's $30,000 to $45,000 on a $150,000 purchase.
• Hardest hit would be first time homebuyers (40% of the purchase market) who have no existing equity to bring to the closing table.
• Lenders would demand higher interest rates and fees as compensation for taking the added risk of losing money when the loan is stripped down.
• The promise of debt relief may encourage more individuals to file for Charper 13

Do not be surprised to hear your elected officials touting this as another way to "help" the economy.

Hal