While recent reports have indicated that the struggling real estate market may finally be improving after several discouraging years, thousands of Americans continue to struggle with the problem of foreclosure/underwater mortgages. However, a recently advanced proposal by Democrats in the House of Representatives is now aiming to rectify this problem via a rather familiar mechanism: Chapter 13 bankruptcy.

For those unfamiliar with underwater mortgages, they are essentially situations where homeowners owe far more on their mortgages than their homes are actually worth.

Underwater mortgages not only affect homeowners - who are often unable to secure mortgage refinancing - they also depress the housing market. Specifically, homeowners are frequently unable to get a mortgage lender to agree to a short sale or are unwilling to take the loss on a sale.

Citing the Obama administration's desire to stabilize the housing market, help underwater homeowners pay down the principal of their mortgages and forestall foreclosures, House Democrats have devised a proposal that they presented to a top official with the Federal Housing Finance Agency (FHFA) earlier this week.

Specifically, the proposal- sponsored by Rep. Zoe Lofgren (D-CA) - would enable homeowners who have filed for Chapter 13 bankruptcy to skip interest payments on their mortgage for five years and have the entirety of their monthly mortgage payments go toward the principal balance.

These homeowners, in turn, would have to consent to drop/settle any outstanding legal claims against mortgage lenders.

"Coordination with the bankruptcy process would make these reductions more likely to succeed than other types of loan modifications, while also limiting the program to those who truly need it," read a letter from Rep. Lofgren and other California Democrats to President Obama.

It remains to be seen whether the Edward DeMarco, the FHFA official with whom the 19 House Democrats met earlier in the week, will consider adopting the proposal. However, he did inform the group that the proposal "has a lot of promise" and that he will get back to them in two weeks after careful consideration of the matter.

"If Mr. DeMarco actually works with us to implement this proposal, it would be an important step to address this crisis," said Rep. Elijah Cummings (D-MD).

Stay tuned for further developments from our Phoenix bankruptcy blog ...

If you are facing foreclosure, you should strongly consider contacting an experienced bankruptcy attorney to learn more about your rights and your options under Chapter 13 bankruptcy.

This post is for informational purposes only and is not to be construed as legal advice.

Source:

The Hill, "Dems say Obama administration mulling paydowns to prevent foreclosures" Oct. 26, 2011