Bankruptcy "tweak" Could Save 600,000 Homes

At first I balked at this idea but looking at it again it makes sense. Essentially they want to change the rule for Chapter 13 Bankruptcy. Currently "judges cannot reduce mortgage debt owed on a person's primary residence, although they may modify mortgages on investment property or second homes."

They want to change that rule. Now here is what happens now. Joe can't afford his house for whatever reason, remember a lot of bankruptcies are due to medical bills, and no one will buy it for the price he owes. The bank will either take the house from him eventually and resell it at the market price. Or they will permit Joe to take an offer from a Buyer for less than Joe owes which is called a short sale.

I will get to the stupidity of the banks in a minute but the judge would essentially drop the amount owed by the Owner. Obviously this will be difficult to standardize but there are some hoops the people would have to go through as seen in the article.

Essentially this is the same thing a bank does in a foreclosure. They take the house and sell it to someone else at a lower price. The difference is they are getting jack squat for the drop. If they actually dropped the prinicpal, heaven forbid, they would keep the customer and earn money.

When they foreclose the don't get the loan typically. The have lawyer fees, personnel fees and realtor fees. They lose even more money than the difference from the principal owed and the final sale price.

So the judge could quicken the process and the bank still is making money. These losses are what has caused the problem in the market. The homes are defaulting and foreclosing and then the bank loses it's money source.

I could go on about the bank's short sightedness but that should be a posting in itself.