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Cutting the Gordian Knot: The Case for Allowing Modification of Home Mortgages in Bankruptcy


Susan E. Hauser


North Carolina Central University (NCCU) - School of Law

June 15, 2010

Journal of Business & Technology Law, Vol. 5, p. 207, 2010

Abstract:     
More than 5 million mortgages have gone into foreclosure since 2007, and an additional 8 to 13 million foreclosures are projected to follow before the current foreclosure crisis abates. Voluntary loan modification programs have failed to ameliorate the crisis, in large part because mortgage lending abuses and declining home values have left many borrowers stranded in "under-water" mortgages.

This article endorses a targeted amendment to section 1322(b)(2) of the Bankruptcy Code that would allow bankruptcy judges to oversee the modification of residential mortgages written to borrowers during years when mortgage-lending abuses were most rampant. Part I of this Article examines existing Bankruptcy Code provisions that allow the modification of other types of loans and then traces the history of the existing statutory and case law that currently prevents borrowers from modifying the terms of most residential mortgages in bankruptcy. Part II describes legislation presently pending in Congress and explains why allowing home mortgages to be modified in chapter 13 bankruptcy offers an efficient and fair solution that not only allows borrowers to remain in their homes, but also benefits lenders and taxpayers. Part III considers and distinguishes the counterarguments offered by the mortgage banking industry.

My conclusion is that allowing mortgages to be modified in chapter 13 plans offers distinct advantages to all parties. Accordingly, a time-limited amendment to section 1322(b)(2) would provide a simple and elegant mechanism for reducing the pain that the home mortgage crisis is causing to borrowers, communities, creditors, and the national economy.

Number of Pages in PDF File: 30

Keywords: bankruptcy, mortgage modification, cramdown, cram down

JEL Classification: G33

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Date posted: June 16, 2010  

Suggested Citation

Hauser, Susan E., Cutting the Gordian Knot: The Case for Allowing Modification of Home Mortgages in Bankruptcy (June 15, 2010). Journal of Business & Technology Law, Vol. 5, p. 207, 2010 . Available at SSRN: http://ssrn.com/abstract=1625466

Contact Information

Susan E. Hauser (Contact Author)
North Carolina Central University (NCCU) - School of Law ( email )
640 Nelson St.
Durham, NC 27707
United States
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