As the housing slump worsens, Congress needs to make it easier for families facing foreclosure to file for bankruptcy and keep their homes, consumer groups and a bankruptcy lawyers’ organization said Thursday.
Homeowners who file for bankruptcy can easily lose their homes under current law because mortgage lenders have a higher priority than almost all other creditors, the groups charged in a telephone press briefing.
The law dates back to the late 1970s, when adjustable-rate mortgages were uncommon and foreclosures were rarely the reason for a bankruptcy filing, officials from the National Association of Consumer Bankruptcy Attorneys said.
Eric Stein, senior vice president of the Center for Responsible Lending, said lenders who made high-interest rate loans to borrowers with weak credit are to blame for pushing homeowners into financial peril.
The Durham, N.C.-based center projects that 2.2 million families will lose their homes due to a growing crisis in the subprime mortgage market of borrowers with the riskiest credits.
“Bankruptcy is not a great option,” Stein said. “It’s a last option, but it needs to be an option.”
However, Floyd Stoner, executive director for congressional relations policy at the American Bankers Association, disagreed. “The focus should be on working with borrowers in financial distress, rather than focusing on changing bankruptcy as the first response to these concerns,” Stoner said.
The NACBA countered that 80 percent of 640 bankruptcy lawyers surveyed nationwide this month said 2005 bankruptcy law reforms are adding to the challenges borrowers facing foreclosure confront in efforts to keep their homes.
“As bankruptcy lawyers in the trenches, we are seeing every day the consequences of this crisis, and it’s only going to get worse,” said Henry Sommer, a Philadelphia bankruptcy lawyer and president of the NACBA, which has long criticized the 2005 bankruptcy code overhaul.
The Washington-based Consumer Federation of America joined the NACBA in calling for Congress to take quick action Thursday as several more lawmakers joined calls for providing hundreds of millions of dollars in federal aid to financially troubled homeowners.
Sen. Charles Schumer, D-N.Y., renewed calls for a government bailout Thursday, a day after the Joint Economic Committee, which he chairs, released a report detailing the housing woes.
“Taxpayers should not be on the hook for deceptive practices by dubious mortgage brokers, but the federal government has a responsibility to protect those who were taken advantage of and also intervene where the markets have failed,” Schumer said in a prepared statement.
Chris Stinebert, chief executive of the American Financial Services Association, said in a statement that rising foreclosure rates can’t be stanched by changing bankruptcy laws.
Laws that prevent mortgage terms from being changed in bankruptcy gives lenders “the predictability and uniformity they need to continue to make loans to deserving borrowers ... The last thing the real estate market needs right now is more uncertainty.”
Especially as mortgage rates to continue rise. Mortgage giant Freddie Mac said Thursday that 30-year fixed-rate mortgages averaged 6.22 percent nationwide, up from 6.17 percent a week earlier. That’s the highest level since Feb. 22 and the second straight week rates have increased.