Bankruptcy judges may soon have to decide whether to help borrowers stay in their homes by lowering the value of the home and also the mortgage debt or honoring the mortgage as it stands, protecting investors. Anyway you slice it, somebody loses.

The process is called “cram down” and it involves homeowners in bankruptcy who are allowed to keep their homes and continue to pay their existing mortgages. Since many mortgage balances are now higher than the value of the mortgaged homes, bankruptcy judges may soon be allowed to lower the mortgage balance in spite of the lenders’ legal right to collect, and the lenders’ obligation to investors.  Losses may be “crammed down” the the throats of lenders and investors in the interest of keeping homeowners in their homes and making payments.

Fannie Mae, Freddie Mac and FHA may have to step in to cover the shortfall to lenders and investors. Another bailout in the making…

Basically, it’s a flood. Nobody can escape it now, we’re all involved whether we rent or own, buy or sell. The value of all our properties will be affected by the over-supply of houses on the market now, which is about twice as many as “normal”.

But that’s not the worst of it.   Real estate industry data suggests that 75% of distressed properties in some areas are not yet listed, so the foreclosure wave is turning into a flood of houses on the market.  More houses than buyers…

Cash investors are buying at auction and holding. Beleaguered homeowners are holding on for dear life as estimates reveal that 12 million are upside-down, owing more than the present market value of their home.

 Will our new president’s plans turn the tide?

By January 31, 2009 Fannie Mae’s National REO Rental Policy will be implemented, which allows qualified renters to sign month-to-month leases and continue renting properties in foreclosure. Renters will not be required to provide a security deposit or verify credit or payment history to property management companies responsible for rent collection and maintenance. That could be risky…

All types of single-family property are eligible for the program, including two- to four-unit properties, condos, co-ops, single-family detached homes and manufactured housing. Properties with loans insured by FHA will require approval from the Department of Housing and Urban Development (HUD).

Buyers can get government help to finance mandatory repairs on distressed, repossessed homes selling for as little as $500 - $1000 now from overburdened lenders.

HUD’s rehabilitation mortgage insurance, available through FHA-approved lenders, is designed to encourage banks to issue long-term loans covering both the acquisition and rehabilitation of a property, according to HUD spokesman Brian Sullivan.

He adds that there may also be grant money available from the $4 billion Neighborhood Stabilization Program, which was a part of the massive housing rescue bill passed by Congress in July, to assist buyers with grants for down payments.

In some areas buyers may be legally required to rehab these homes to bring them up to code. In Detroit, buyers are required to sign Affidavits of Compliance Responsibility, which obligates them to make repairs outlined in an inspection report. Only after passing inspection will a certificate of occupancy will be issued, making the house legal to live in.