The Mortgage Crisis And Bankruptcy Filing
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People who took out bad mortgages or bought houses they couldn’t afford once interest rates reset shouldn’t be helped. “I acted responsibly,” they said. “Why should someone who acted less responsibly than I did be rewarded by a better deal then I got?” Others say that the collective impact of these mortgages going into foreclosure and people filing bankruptcy have such a negative effect on the economy that something needs to be done to staunch the hemorrhaging.
The problem is that all of the solutions discussed thus far seem to carry a high price tag. Buying the bad mortgages would cost hundreds of billions, as would giving government benefits directly to people with bad mortgages.
Also when it comes to mortgages, there are many people that have been scammed by a mortgage broker, promised one loan and given another. To the untrained eye, unless those flaws are obvious in the loan documents, the future holder of the loan is not liable for that claim. If proper assignments were not completed until just in time for court, the consumer may have plenty of rights to offset the claims made by the servicer. But consumers will never know the option is there if the lender can hide the chain of assignments behind smoke and mirrors. Bankruptcy courts are federal courts. Federal courts are constitutionally limited to addressing only a case or controversy between parties who have a true stake, something to win or lose in the outcome. Someone claiming such a stake has to be able to prove it.
Recently decisions have been made requiring the lending industry to disclose what it has been doing with loans. It’s a small thing but very important. Homeowners rarely understand how their loan ended up where it is. Sometimes they have conflicting information about who is entitled to the payments. Servicers don’t always talk to each other coherently when they pass paper between themselves, so how can a consumer not trained in mortgages be expected to understand it? Consumers may discover they have rights and claims which should be vindicated. Consumers don’t know when their rights are violated, in fact, they often are outraged by things which are lawful while only confounded by the unlawful. A lot of these consumers never find out any of this until they file for bankruptcy and are being foreclosed on.
Bankruptcy filing is or can be the most powerful foreclosure tool if used properly. In fact bankruptcy is probably the most powerful financial tool one can use in this country. And in these tough economic times, it’s not so it’s a question of whether a bankruptcy filing can stop foreclosure, but more of a question of what else cans bankruptcy due in addition to stopping the foreclosure. For instance, it may be possible to attach the mortgage itself and entirely strip off the property if there is an enforceability issue. Likewise, if new legislation is passed, arrears may no longer be an issue since the home loans will be entirely restructured into one mortgage reduced to a fair market value, with a lower interest rate, a lower payment, and spread over 40 years.
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