To their list of worries about how the coronavirus pandemic is affecting customers and their own bottom lines, bankers can now add this: a potential spike in home mortgage modifications tied to small-businesses bankruptcies, the American Banker reported. Last year, Congress made changes to the Bankruptcy Code that allowed borrowers to modify these second mortgages in the event their businesses fail, perhaps saving them from having to sell their homes to settle their debts. Protections were further expanded when the coronavirus relief package was passed in March. While these changes provide a measure of relief to borrowers — particularly with bankruptcies expected to increase as the pandemic drags on — they can cause problems for banks and investors that hold the loans. That’s because interest rates are often lowered in the modification process, reducing a loan’s value. “It could be a headache in that a mortgage that a lender thought was not modifiable is now suddenly modifiable,” said Bonnie Pollack of Cullen and Dykman LLP who represents lenders in these new bankruptcy cases. Banks have been combing through their portfolios searching for which mortgages might suddenly be modified in the new bankruptcy program. An exact number across the industry is hard to pin down, but a 2018 survey by the Federal Deposit Insurance Corp. sheds some light on how often small-business owners use the equity in their homes to secure a loan.
