Hearings on Allowing Mortgage Modification in Chapter 13

The House Judiciary Committee is holding hearings on “Straightening Out the Mortgage Mess”. The question is whether Sec. 1322(b)(2) should be amended to allow modification of home mortgages. Currently, that section does not allow modifications. The reason this prohibition was originally added was because without it, mortgage banks argued that the credit market would dry up for home mortgages.

Predictably, the bankrutpcy folks from NACBA and the National Bankruptcy Conference argued in favor of allowing modification and the Mortgage Banking Association argued against allowing modification.

Interestingly, however, an economist from Moody’s, Mark M. Zandi, testified that “there is no reason to believe that the cost of mortgage credit across all mortgage loan products should rise” and that “[p]roperly designed, the legislation could reduce the number of foreclosures through early 2009 by at least 500,000.” This has always been my biggest question: (1) would allowing mortgage modifications dry up credit and (2) if not, can Congress be convinced enough by this so that they are willing to pass legislation allowing modification of mortgages? I think that the answer to (1) is “no” for several reasons: (1) before the credit crisis, there was no problem getting a loan in the non-primary residence home mortgage market, (2) there has already been a tightening of credit across all sectors, so we should probably expect a loosening of the lenders want to make money in the future. With some solid data from economists concurring on this point, I think the legislation is in much better shape than it would have been otherwise.