The large fraction of their incomes that bankrupt homeowners commit to paying their housing cost reduces the odds that they will succeed in saving their homes in bankruptcy and completing their chapter 13 repayment plans. The Article considers how these data could inform the debate about whether Congress should amend the Bankruptcy Code to permit the modification of home mortgages, offering examples from real bankruptcy cases to show the beneficial effects of mortgage modification to create sustainable homeownership. It concludes that permitting mortgage modification would enhance the usefulness of bankruptcy as a tool to address the foreclosure crisis. Foreclosures have now skyrocketed to three times their historic rates. But the causes of
this foreclosure crisis are very different than the foreclosures of the past. Since the late 1990s,
mortgage lending, once considered the safest of all investments because of the well-researched
decision-making that carefully documented the ability of a borrower to repay, morphed into an
assembly-line business that looked nothing like mortgages of the past. This new approach to
mortgage lending included steering high-priced mortgages to people who may have qualified for
lower-priced fixed rate mortgages and aggressive marketing of high-risk loans to people whose
incomes made it clear that they could not possibly repay over the life of the loan. In effect, such
mortgages could be repaid only if the housing market continued to inflate at historic rates and
borrowers could endlessly refinance their loans. After dizzying price increases in many parts of
the country, housing prices flattened, refinancing became impossible, and the bubble burst.
Now millions of Americans find themselves unable to meet their monthly mortgage
payments. Millions more people who can make their payments now recognize that they owe far
more than their houses are likely to be worth for many years, and some are walking away. Over
the next few years, an estimated one in every nine homeowners is likely to be in foreclosure, and
one in five will likely have a mortgage that is higher than their house is worth, making default a
financially rational alternative.
Mortgage foreclosures pose a special problem. Millions of people could make marketrate
payments on 30-year fixed mortgages for 100 percent of the current market value of their
homes. But these can-pay families are driven into foreclosure because they cannot pay
according to the terms of the higher-priced mortgages they now hold, and refinancing options are
limited or nonexistent. After accounting for the costs of foreclosure and the lower prices
foreclosure auctions bring, the lenders will lose an average of $60,000 per foreclosure and
recover far less than the market value of the homes. Foreclosure for can-pay families destroys
value both for the family forced out of its home and for the investor who

loan modification

stop foreclosure