Sub-Prime Mortgage Crisis & Chapter 13 Filings

In recent months, the amount of foreclosures filed
throughout the country has more than doubled from the same
time period last year.  The reasons for such high
percentage of filings are numerous.  Primarily, the
sub-prime mortgages have landed in the hands of individuals
who most likely did not qualify for convention financing.
Thus, the interest rates on the loans remain higher than
other conforming loans.  Additionally, many of the
sub-prime loan products involved adjustable rates (ARMS)
which typically re-set within the first few years of the
loans inception.

As sub-prime loans relate to Chapter 13, the typical
scenario is as follows:  The homeowner qualifies for the
loan without a substantial down payment and without
significant income documentation.  The monthly payment is a
stretch for the homeowner; however, it is temporarily
manageable.  Depending upon the type of ARM, the loan may
reset in one, two or three years.  It is at that point in
time that the homeowner may not be able to make the new,
higher mortgage payment.  The homeowner is also unable to
refinance the debt on the property since the type of loan
products needed to accomplish that task no longer exists.
Thus, the homeowner is in quite a tough situation.  The
current real estate market would make it nearly impossible
for the homeowner to sell the property and pay off the
mortgage.  Chapter 13, known as the home saver case, would
not be practicable in the case of adjusting ARMS.

The idea behind Chapter 13 bankruptcy is to allow a
homeowner to catch-up on whatever mortgage arrears have
arisen in addition to making the current mortgage payment
on time.  As rates adjust and loans reset, the homeowner
simply cannot make the current mortgage payment, let alone
a partial payment to catch-up.  The situation is basically
a doomsday for both the homeowner and the mortgage company.
 The homeowner was banking on the ability to make the
payments and/or refinance the outstanding debt at a later
date.  The lack of real estate appreciation has led to the
inability on the part of the homeowner to do just that.

What we are likely to see is a large number of homes on the
market for sale.  Many of the borrowers will file for
Chapter 7 bankruptcy and not Chapter 13 bankruptcy. I
believe that the market will take five to seven years to
begin to show some signs of appreciation.  It will be
interesting to see if Congress amends the bankruptcy code
to allow mortgage debts to be adjusted.  If not
permanently, then for a short time frame of three to five
years.


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David M. Siegel is the author of Chapter 7 Success: The
Complete Guide to Surviving Personal Bankruptcy. He is a
member of the American Bankruptcy Institute and currently
practices bankruptcy law in Chicago and its surrounding
suburbs. Additional information is available at
http://www.chapter7success.com .