FHFA: BK Should be Last Resort for Homeowner

A troubled homeowner should be given every chance to modify his mortgage before filing for bankruptcy, according to the nation's GSE regulator who is concerned that changes in the bankruptcy code could actually hurt families and their bankers. Homeowners should not have to go through the "hardship and rigors" of bankruptcy to get their monthly payments reduced to an affordable level, said Federal Housing Finance Agency director James Lockhart. The Obama administration has outlined a $75 billion program to modify and refinance problem mortgages. But the administration also is supporting changes to the bankruptcy code that would allow judges to reduce or 'cram down' the principal amount of the mortgage. Although Obama's bankruptcy cramdown proposal is much more conservative than the bankruptcy bill recently passed by the House Judiciary Committee, Mr. Lockhart is concerned Congress will "go too far" and pass legislation that could be harmful. Bankruptcy sounds like a "good" solution, he said, "but it hurts individuals. And it can really dramatically weaken the balance sheets of our weak financial institutions, so we must be careful." Once a homeowner is in bankruptcy, Mr. Lockhart wants him to get one more chance at a loan modification and avoid living under a five-year bankruptcy financial plan. The bankruptcy judge should tell the servicer what the court is prepared to do and give the servicer "one more shot at it," he said.