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Foreclosure seems to the on the tip of everyone’s tongue these days.

Whether you are a homeowner that is facing foreclosure or you are suffering from watching your home lose its value due to foreclosed homes in your area, you will want to pay attention and see how the Senate will vote on the bill called “Helping Families Save Their Homes Act of 2009″ (S.61). Congress passed it’s own version of the bill (H.R. 1106) 234-191 without the help of area Representatives Vern Buchanan (R) and  Tom Rooney (R). It was reported in the Sarasota Herald-Tribune that both men said they were concerned that allowing judges to change the terms of mortgages would create more uncertainty in the already unstable credit market.

I spoke with Gerri Detweiler, a nationally recognized credit advisor for Credit.com, and co-author of Debt Collection Answers: How to Use Debt Collection Laws to Protect Your Rights. We had a chance to sit down and talk about why this bill is so important.

Why is judicial modification of mortgages so important?

“In Florida, this measure is critical to stabilizing our real estate market and helping families stay in their homes. According to the Center for Responsible Lending there have been 82,869 foreclosures in our state already in 2009. And that number is going to grow as the economy continues its downward spiral. I know I am not sounding very positive here, but looking at the data on household debt (credit cards, auto loans, etc.), combined that with the employment numbers, I believe it’s going to be a while before we fully work through this.

“Voluntary efforts by the industry to modify mortgages have failed miserably. Homeowners face enormous hurdles when dealing with mortgage lenders, and the loans that have been modified to date have offered so little relief that many borrowers find themselves back in foreclosure within the year.

“We need an objective third party to essentially force both parties to the table and provide a realistic solution. That’s what bankruptcy judges do every day for individuals, small businesses and large corporations. This legislation will allow bankruptcy judges to modify mortgages for homeowners in bankruptcy. It is no different than what they do every day for businesses. They can currently order modification of mortgages for real estate investors, just not for homeowners. It makes no sense.

“The best part of this approach is that it doesn’t cost taxpayers a dime. No government subsidies are required.”

But to be devil’s advocate, why should people who got loans they couldn’t afford be let off the hook for their mistakes?

“There are a couple of major problems with this argument. The first is the implication that greedy, irresponsible borrowers were the problem. We certainly had our share of that in Florida, but you must remember that every single step of the way people were being told they were doing the right thing:

• Buy before you are priced out of the market,
• Take advantage of historically low interest rates [and]
• Real estate is a solid long-term investment for your retirement.

“Lenders sold that dream with exotic products they would package and sell to investors around the world. Any mortgage broker in Florida can tell you they were encouraged by at least some of the lenders to go ahead and fudge the facts to make the loan.

“The second problem is that every single foreclosure in a neighborhood affects other properties in the neighborhood. Even if you own your home free and clear, you are paying for these foreclosures. If we cannot stop the increasing number of foreclosures then we will not see a bottom to this market in Florida. Just look at Manatee County’s numbers last month and you’ll see that the end is not anywhere in sight. That means more properties in foreclosure and continuing downward pressure on prices. And anyone who thinks we are near the bottom (absent this reform and other measures to improve our economy) is in serious denial.

“The third thing I would argue is allowing a consumer to file for relief through bankruptcy is a far cry from letting them off the hook. The people I talk with do not want to file. For most of them, it truly represents the end of the line financially. When they do go through bankruptcy their finances will be carefully scrutinized, and they may have to forfeit non-exempt property in order to have their plan approved.

“Finally, let’s look at the end result. The homeowner stays in his or her home, making mortgage payments, paying property taxes, etc. Their children stay in school, and as long as they stay employed, they continue to be productive Florida citizens. When their bankruptcy is completed they should have an affordable mortgage and some of their other debts will have been either lowered or wiped out. So hopefully their finances are in much better shape going forward.

“The other alternative is to let their home go into foreclosure, at which point if may well be stripped and vandalized. The bank takes possession and tries to sell it at a fraction of the value. These homeowners either become homeless, try to pull it together to rent, or leave Florida. Their children live through the stress of a foreclosure and upheaval and that affects their education — and futures. A report released a year ago by the Brookings Institute noted that an estimated 2 million children will be affected by the housing crisis in the next two years. (The number may be higher now.) These children are likely to suffer at school as well as have behavioral and physical problems. For them, the effect can last for years.”

So why isn’t this a no-brainer? What’s the controversy?

“Many in the lending industry are telling us that it will cause the cost of mortgages for other consumers to rise. That argument seems to hinge on the notion that lenders will come out ahead if they work directly with consumers rather than getting a bankruptcy judge involved. However, the data do not back this up. Voluntary efforts are failing.

“In Florida, the problem is so enormous that we simply cannot afford to wait any longer. We need to allow bankruptcy judges to do their job and work out a solution that works for everyone involved.

“Some lenders, however, have come out in favor of this measure, in large part because it will provide some protection for them. The threat of lawsuits from investors who have purchased these loans has been stopping many lenders from offering modification options that really work.

“After following this issue for several years now, I strongly believe that this measure will make a huge difference, not just for homeowners in Florida but around the country. And it won’t just help homeowners who file for bankruptcy. Homeowners who are having trouble keeping up with their mortgage payments may find lenders are more open to working with them because lenders know that bankruptcy could be an option. And those who are doing just fine won’t have to keep throwing tax dollars at solutions that are not working.”

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