Those favoring aggressive loan modification efforts argue that a consistent, but reduced, payment is better than no payment at all. However, servicers have been unable or unwilling to apply standardized loan modification practices, such as systematic rate reductions, to many high cost loans at immediate risk of foreclosure.

Evidence from around the country suggests that, while some servicers have gone to extraordinary lengths to renegotiate unaffordable loans, many more have not. This reluctance has not gone unnoticed by policymakers. A bill introduced by Rep. Paul Kanjorski (D-PA) would create a safe harbor that would protect servicers carrying out loan modifications from legal action by the investors who own the loan. This would allow servicers to develop and apply aggressive loan modification plans without fear of being sued by investors. Putting borrowers in modified loans that they can afford over the long term is a better option than growing numbers of vacant and depreciating properties, and, with such a safe harbor, servicers will be out of excuses.

Senator Dick Durbin (D-IL) is leading another effort that would help troubled homeowners in bankruptcy and provide an additional incentive for servicers to conduct meaningful loan modifications. The existing bankruptcy code prohibits the modification of mortgage loans as part of the bankruptcy proceeding. This restriction was clearly designed for a time when a mortgage was probably the best priced and most fair loan a borrower could get. For many borrowers, their mortgage is now their worst loan. Senator Durbin’s bill would allow for the modification of a loan on a borrower’s primary residence during bankruptcy. Certainly there will be circumstances where there is little a judge can do to keep a borrower in her home. But when a borrower can continue to make a (slightly reduced) payment, in full and on time, judicial loan modification should be an option. Additionally the looming possibility of a judicial loan modification may spur servicers to be more proactive about substantially modifying loans prior to bankruptcy.

There is no shortage of evidence that the second-order effects of foreclosure have touched communities in both their wallets and their well-being. For each new foreclosure, the value of neighboring properties decreases by one percent, while at the same time increasing the frequency of violent crime. Thankfully, these second-order effects are not lost on policymakers and both of these proposals deserve serious consideration.

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