Foreclosures jump 30 percent in 3rd quarter

Earlier this month, Treasury Secretary Hank Paulson said an industry coalition was working to help homeowners head off foreclosures and keep their homes. Paulson said the plan was for the government to coordinate efforts by lenders to help rework loans for borrowers in trouble and head off default. Paulson said 11 of the largest mortgage service companies, which together handle 60 percent of all mortgages in the country, had agreed to join the new coalition. Other members will include mortgage counseling agencies, investors and large trade organizations.

One proposal would be to simply freeze the introductory rates for homeowners who are still current on their mortgages to help them avoid defaulting when their monthly payments jump.

On Tuesday, the House Judiciary Committee heard testimony on a proposal to make changes to the U.S. bankruptcy code that could help stem the rising tide of mortgage defaults. Among the proposals is a provision that would give bankruptcy judges greater leeway to restructure debts for people unable to meet sharp increases in monthly payments. Under current law, judges have the authority to modify other types of borrowing, including credit cards or car loans.

"Residential mortgage loan defaults and foreclosures are surging and without significant policy changes will continue to do so through 2008 and into 2009," said Mark Zandi, chief economist at Moody's Economy.com in West Chester, Pennsylvania, who broadly endorsed the plan.

Two million homeowners will have their property seized between this year and next, Zandi said, and the bankruptcy reform plan is needed to confront that crisis.

Supporters of the proposal say quick action is needed.

"You either do this sooner or you do it later," said William Brewer, Jr., a North Carolina bankruptcy lawyer. "If I am right, you will come back here next spring and this fire I am talking about will be burning out of control."

The proposal, backed by consumer groups but opposed by the lending industry, would give bankruptcy judges new authority to modify mortgage terms for homeowners deemed to be insolvent. It would let bankruptcy judges extend the life of a home loan, change the interest rate or simply mark down the loan amount.

Opponents of the changes say giving judges the power to alter loan terms could make it harder for new borrowers to find loans. The proposal would also force mortgage lenders to raise their rates in order to cover the additional risk of a bankruptcy judge scratching the terms of a loan, according to David Kittle, chairman-elect of the Mortgage Bankers Association.

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