U.S. Home Foreclosures May Not Be Cut by Bankruptcy Reform, Barclays Says

[Purveyor]

By Jody Shenn

Jan. 14 (Bloomberg) -- A proposed change to bankruptcy laws that would allow judges to reduce consumers’ mortgages may not succeed in reducing the foreclosures that have been dragging down property prices, according to a Barclays Capital strategist.

Some borrowers would later default on their reworked loans while others, who wouldn’t benefit by filing because their incomes are high enough to handle their debts, would face “a greater temptation” to abandon their obligations if their neighbors get bailed out, Glenn Boyd, head of U.S. asset-backed securities strategy at Barclays in New York, said yesterday.

“Bankruptcy cramdowns essentially tells them that everyone else has been given leeway to abrogate those contracts,” he said in an interview. “The concern is more people will walk away from their homes.”

Prospects for bankruptcy reforms increased last week after Citigroup Inc. endorsed a Democratic proposal that would give judges the ability to adjust the principal, interest rates and terms on mortgages. The deal has yet to win support from the rest of the banking industry, which joined Republicans last year to help kill similar legislation aimed at slowing foreclosures.

Critics of the plan, including the Financial Services Roundtable trade group, say the changes would raise the cost of mortgages and other loans by creating doubt among lenders about the strength of their contracts.

In November, a total of 259,085 properties got a default notice, were warned of a pending auction or were foreclosed on, according to RealtyTrac Inc., an Irvine, California-based seller of default data. That was up 28 percent from a year earlier. Depressed by mounting foreclosures, home prices in 20 major U.S. cities fell 18 percent from a year earlier in October, the fastest on record, according to an S&P/Case-Shiller index.

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