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Bankruptcy and the housing market

A federal program that helped around 1.2 million homeowners struggling with their mortgages is set to expire this year.

Called the Home Affordable Modification Program, the offering allowed borrowers to modify their mortgages for up to five years, at interest rates lower than market rates. Specifically, many homeowners were able to obtain rates lowered to around 2 percent.

Notably, the timeframe set by the program is similar in one aspect to a Chapter 13 bankruptcy filing. In a Chapter 13, the court approves a repayment plan that provides debtors with a more manageable approach to their existing credit obligations. Debtors make partial payments pursuant to the schedule and terms of that repayment plan, which generally lasts between three and five years. After that period, many of the debts are discharged. Best of all, Chapter 13 filers are often able to keep their homes.

As with a Chapter 13, the participants in the modification program benefitted from a five-year period of relief -- in this case, lowered mortgage rates for up to five years.  After those five years, a debtor can expect to see his or her mortgage rate brought up to current market levels, but at a gradual increase.

The program's approval process has also been staggered, with 894,410 borrowers still in the process of modifying their rates under the program. However, the first group to pass through the procedure when it launched in April 2009 will now see their rates increased this fall by 1 percentage point. That increase will continue each year until market levels are reached. Currently, the market rate is 4.5 percent, and many commentators expect that rate to keep rising in the coming years. Hopefully, the brief respite has allowed debtors to take a more controlled approach to debt management. A bankruptcy attorney might have additional options to suggest.

Source: CNBC, “Rates will bump up for borrowers as mortgage bailout expires,” Diana Olick, Feb. 14, 2014

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