Prepackaged Ch. 13 Bankruptcies

I found this article interesting for two reasons (1) it gives a good description, as far as I can tell, of the issues and problems associated with the servicing related to defaulting loans and (2) presents a novel idea towards solving the ‘underwater’ property issues.

Abstract:
“The housing crisis threatens to destroy hundreds of billions of dollars of value by
causing homeowners with negative equity to walk away from their houses. A
house in foreclosure is worth 30 to 50 percent less than a house that a homeowner
either retains or sells on the market, and a foreclosed house damages neighboring
property values as well. We advocate a reform of Chapter 13 that would allow
homeowners to strip down the value of their mortgages in a prepackaged
bankruptcy. Such a plan would give homeowners an incentive to keep or resell
their homes, thus reducing the market value loss of homes while protecting the
effective value of creditors’ interests. Two further key elements of the plan are
that it uses prices based on the average house price in a particular ZIP code, which
reduces moral hazard; and it is automated, requiring only a rubber stamp by a
bankruptcy judge or other official, thus preserving judicial resources. Other plans,
including that of the Obama administration, are compared.”

Electronic copy available at: http://ssrn.com/abstract=1349364