Logic and reality have been bouncing off my clients’ deflector shields recently on the issue of their houses.  Confronted with the gap between their income and even the payment on a modified loan, I get the refrain, “But keeping the house is the most important thing in my case!”

Yes, and how do you expect to do that?   I get no meaningful answer.

This house business has become so irrational and  embedded that I’m thinking it’s a resistant strain of something. (Is there a strain of “Home Flu”?)   “House” or “home” is like God or motherhood:  a positive one dare not challenge with words about economic reality.

What’s interesting about these reactions is that seldom are we talking about the long standing family home.  We’re talking about houses purchased in the past  five years or so.  Which of course corresponds to the frantic run up in Bay Area home prices.  So these homes were, from the beginning, never likely to be the family seat.

How do I persuade people that a home is simply housing, and what’s really important are the people who live there?

The time between a notice of default on a mortgage loan and foreclosure now averages 176 days.  California law requires only 112 days.  So, while the number of defaults is increasing, the interval between the statutory notice of default and actual sale is also increasing.

Before the recent crisis, lenders typically issued a notice of default after three missed payments, and marched fairly briskly to a foreclosure sale.  I’m now seeing longer periods before initiating foreclosure and even voluntary postponements of sales by the lender.

This trend is particularly important to those who have decided to let the house go to foreclosure.   Where the loan terms are impossible, and without the possibility of modifying the loan in Chapter 13, or the income stream has shrunken, homeowners are trying to calculate how long they can remain in the house before title to the house passes to the lender.

Sadly, in this economy, for many homeowners the only return they will see on their investment in a home is the right to live there, payment free, until the foreclosure.

Quick:  how is a small Tennessee town like a California family facing foreclosure?  The New York Times suggests it’s because they were both sold risky financial products to meet their borrowing needs.  The unemployment-wracked town of 11,000 was not told about the interest rate risk in the bond derivatives that financial advisors promoted and sold the town.  The interest payments on the town’s bond debt have quadrupled.

That’s essentially the same story I hear from clients with adjustable rate, pick a payment loans on their homes.  The financial professionals advising them talked only about the immediate consequences of the loan, and downplayed the risks.  Over and over, clients tell me that when they questioned the broker about how they were going to make the full principal and interest payment, they were assured the broker would get them a better loan before any damage was done.

Why is it that politicians opposing mortgage modification in bankruptcy want to demonize the unsophisticated borrower without regard to the supposed professionals who sold and profited from these exotic financial products?  Are we going to hear that the city council of Lewisburg, Tennesee bought more sewers for the town than they could afford?

When are we going to put our energies into a solution to the foreclosure crisis, rather than finding a scapegoat?

The banking industry is swarming over Capitol Hill in an effort to gut or defeat S. 61, the Helping Families Save Their Homes Act.  The latest tactic is to try to limit the loans that can be modified in bankruptcy to sub prime loans.

These Senators are thought to be undecided or subject to being swayed one way or the other:

Max Baucus – Montana

Robert Byrd – West Virginia

Tom Carper – Delaware

Tim Johnson – South Dakota

Mary Landrieu – Louisiana

Joe Lieberman – Connecticut

Blanche Lincoln – Arkansas

Claire McCaskill – Missouri

Ben Nelson – Nebraska

Mark Pryor – Arkansas

Jon Tester – Montana

The freshman Democratic Senators have no history with this issue:

Mark Begich — Alaska

Michael Bennett – Colorado

Roland Burris – Illinois

Kirsten Gillibrand  — New York

Kay Hagan – North Carolina

Ted Kaufman – Delaware

Mark Udall – Colorado

Tom Udall – New Mexico

Mark Warner – Virginia

A few Republicans

Bob Corker – Tennessee

Richard Lugar — Indiana

Mel Martinez – Florida

Arlen Specter — Pennsylvania

George Voinovich — Ohio

If you or family or friends are constituents of any of these lawmakers, give them a call or email in support of a no cost opportunity to stop the housing collapse.

Call them toll free: 877.354.4958

Or email at: www.nacba.org/TellCongress

Ask them to support a strong and comprehensive judicial mortgage modification buill.

Legislation attached to the long delayed California budget halts foreclosures on family homes in a move designed to accommodate loan modifications.

According to the Legislative Analyst, the bill

• prevents issuance of a notice of sale under CA foreclosure law for an additional 90 days beyond the statutory reinstatement period
• applies only to first mortgages on homes that are the primary residence of the borrower when the default occurs
• covers only loans recorded between 2003 and Jan. 2008
• exempts servicers who have a qualifying loan modification program in place

From my perspective, the standards in the bill for a qualifying modification program are not very high and there is no requirement that  they are applied in a way calculated to actually modify the loan.

But half a loaf is better than where we are today.

Spokesmen for the banking lobby expect the world to stop spinning if bankruptcy judges gain the right to modify home mortgages. They construct a parade of horribles if a contract between a lender and a borrower is altered.

What they don’t explain is why this very same power to modify mortgages has not crushed the market for rental property, second homes, and commercial buildings. A bankruptcy plan can, today and for decades past,  change the terms of a loan on any of those kinds of property. Last I looked, the world was still turning.

The prohibition on altering the terms of a home loan is a 1984 addition to the bankruptcy law enacted in 1978. It is a special carve out for the home lending industry. Congress was told that it was necessary to promote home ownership. Perhaps a change is necessary to preserve home ownership.

My veterinarian father used to say that a goose is so stupid that it wakes up in a brand new world every morning. He probably didn’t know any lobbyists.

The NBC Sunday morning new shows  were again talking about moral hazard as applied to efforts to stem the tide of foreclosures.  This concept looks at the message we send when we rescue a homeowner who took out a bad loan and give nothing to the prudent homeowner who didn’t take an exploding ARM loan.

Should I thwart efforts to bail out my next door neighbor who was foolish because it rewards the fool, and gives me nothing?

Personally, in these circumstances, I am not offended by mortgage bailouts.  Seems to me to argue that the improvident (or the simple) should pay the price by loss of their homes to preserve the high moral ground for those who didn’t succumb  is short sighted.

If my neighbors lose their homes in foreclosure, the value of my house goes down.  If several neighbors lose homes, I’m neighbor to the bank’s REO department and the neighborhood becomes at best less sociable, at worst, less safe.  I don’t count on the bank in the house next door to loan me a cup of sugar.

The beauty of the bill to permit judicial modification of home mortgages is that it costs the taxpayer nothing; preserves families and neighborhoods; and merely recognizes the loss in home value that the homeowner and the lender have already experienced.

I’m perfectly OK with that.

I’m giddy at the prospect of modifying mortgages in Chapter 13 as an alternative to Truth in Lending suits.  While I’m finding lots of violations, and they give me levers against the lenders,  the TILA statute contemplates that the wronged borrower return the difference between their damages and the original loan to the lender.

In this credit market, I am fearful that many borrowers, particularly the older and the lower income homeowners, won’t be able to get a loan to tender back to the lender.

With the prospect of  mortgage modification, I expect that in a number of my cases, modification of the existing loan, especially if we can reduce principal to the current value of the property, will produce a better result for the client and one that does not require a new loan.

Pretty heady stuff.

Two positives today in the quest to allow bankruptcy judges to enforce modification of home mortgages:  Citibank came out in favor of the change.  This seems monumental since it’s been the bankers who have crushed earlier attempts to repeal this safe haven for mortgage lenders.

The second was Obama’s call to move the stimulus bill quickly.

I’ve read the bill and am planning on how to use it when it becomes available.   Upon enactment, it will apply to cases already on file.

Stand back!  I’m on my soapbox again.

This blog got its start when bankruptcy “reform” legislation was under consideration in Congress and I had heartfelt views about the defects of the proposed changes.  Bankruptcy in Brief has attempted for 10 years to be objective and informative.   I needed to advocate, and thus on the Bankruptcy Soapbox was born.

Yesterday, S. 2136 was introduced in the Congress, which would enable bankruptcy judges in Chapter 13 to modify mortgages on people’s homes. The experience of most all professionals in the housing world is that voluntary loan modifications are infrequent and inadequate.  Extending  the mortgage cram down provisions to homes would utilize the existing infrastructure of the bankruptcy courts to make meaningful modification possible, under court supervision.

My colleague Carmen Dellutri recounted the history of the mortgage modification provision, which prior to the current meltdown, was defeated by the arguments of the mortgage bankers.  They asserted, falsely it appears, that to do so would increase everyone’s mortgage interest rate.  Prof. Adam Levitin of Georgetown University Law Center   analyzed that claim and found it baseless.

(One might also ask, why should the mortgage bankers, who had a large hand in bringing the American economy to its current strait, have any credibility on this issue?   But, it seems, they are wrong as well as guilty, so we can move on.)

So, once again I’m calling on the interested public to contact their representatives in Congress.  Voice support for this change and urge your Senators and Members of Congress to pass this bill immediately.  Every day without it, more families lose homes to foreclosure.