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Home General News Mortgage Industry Articles Mortgage and Bankrupty Reform effect
Mortgage and Bankrupty Reform effect PDF Print E-mail
Written by BLOOMBERG NEWS   


A change in bankruptcy laws to allow judges to reduce the mortgages of consumers would probably boost filings, accelerating lenders' losses on home-equity, automobile and credit-card loans, according to Keefe, Bruyette & Woods.

"Many homeowners may be more willing to face the stigma and related credit problems associated with bankruptcy if they know it will allow them to remain in their home," Keefe, Bruyette analysts including Frederick Cannon and Bose George wrote.

Bankruptcy reform legislation has "increased momentum," the analysts wrote, after Citigroup Inc. endorsed a Democratic proposal last week that would give judges the ability to adjust the principal, interest rates and terms on mortgages during bankruptcy proceedings.

The deal has yet to win support from the rest of the banking industry, which joined Republicans last year to help kill a similar idea aimed at slowing foreclosures.

The provisions would force some lenders to take losses without a say in bankruptcy court proceedings. Home equity loans will be the "first to come under pressure," the analysts wrote, and banks and other companies holding mortgage bonds without government backing may also see higher losses.

The effect on financial-services companies of the bankruptcy law change would vary and even those firms harmed may benefit in some ways, the Keefe, Bruyette analysts wrote. Credit-card companies, for example, may find some troubled borrowers are better able to repay their debt as judges rework home loans to a more affordable level, the analysts wrote.

Mortgage servicers managing payments and collections on outstanding loans, which may face higher costs in dealing with bankruptcies rather than foreclosures, could also benefit from having the lengths of their contracts extended, the analysts wrote.

Private mortgage insurers would benefit because a "cramdown" by a bankruptcy judge wouldn't be viewed as triggering a payout to lenders, the analysts wrote. Homebuilders would also benefit from reduced competition from foreclosure sales, they said.