Proposed bill would allow principal write-downs in bankruptcy courts

An Oregon congressman is backing a bill that, if passed, would allow bankruptcy judges to force principal modifications on primary home mortgages during bankruptcy.

Rep. Earl Blumenauer, D-Ore., proposed The Bankruptcy Equity Act to amend bankruptcy laws to allow judges to modify mortgages on principal residences of debtors to prevent foreclosure and cure distressed situations.

“People with vacation homes or investment properties can have their mortgage terms reduced by a bankruptcy judge, but regular folks who live in their own homes are forced to play by different rules — bankruptcy judges aren’t allowed to change mortgage terms of primary residences,” Blumenauer said in a statement on his website.

Blumenauer also spoke on Capitol Hill about the proposed bill, H.R. 4058, suggesting that while companies and enterprises with multiple homes on their balance sheets can simply file for bankruptcy to get mortgage relief, homeowners are left with no option but a foreclosure.

The proposed bill was referred to the House Committee on the Judiciary, the House Committee on Financial Services, the Subcommittee on Insurance, Housing and Community Opportunity and the House’s Committee on Veteran’s Affairs.

The bill, which is in its infancy stages, touches upon some of the more controversial issues in mortgage finance and banking.

In the past, servicers, banks and investors have shunned the idea that forced mods or bankruptcy judge involvement will save troubled loans, especially since most troubled borrowers simply can no longer afford their mortgage.

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