What is the fundamental issue?
Until the recent round of abusive lending and housing market turmoil, the most effective remedy available to homeowners facing foreclosure to stay the foreclosure was to file for bankruptcy under Chapter 13 of the Bankruptcy Code. Today, however, an increasingly significant percentage of borrowers filing under Chapter 13 for bankruptcy are losing their homes to foreclosure because they can’t keep up with the financial demands of problematic mortgages.

In order to assist those saddled with abusive loans and minimize the turmoil created for families, neighborhoods, communities and housing markets by abusive lending practices, bankruptcy reform measures are being discussed to amend the bankruptcy code to allow mortgages on primary residences to bifurcated into a secured and unsecured and mortgage interest rates and terms to be modified by bankruptcy judges.

I’m a Realtor®. What does this mean to my business?
Bankruptcy reform could impact REALTORS® in a number of ways. Proposed reforms would provide homeowners and REALTORS® with additional leverage to negotiate short sales with mortgage lenders. In addition, the proposed changes could give REALTORS® attempting to help homeowners keep their houses another tool to negotiate a loan modification and avoid foreclosure.

Conversely, the housing market would be impacted by higher interest rates and potentially less liquidity in the secondary mortgage market, making it tougher and more expensive for buyers to secure a mortgage if lender confidence is shaken by the potential for a future involuntary loan restructuring (e.g. rate reduction, cramdown, term extension, etc.) in the course of a borrowers bankruptcy proceeding.

NAR Policy:
While NAR does have policy from the early 1990’s that opposes cram-downs, NAR currently has no policy applicable to the current proposed reform measures.

When this anti-cram-down policy was adopted, loans were predominantly fixed rate mortgages; 2/28s and exploding ARMs did not materialize until early 2004. The housing market and types of mortgages products having evolved dramatically since the last time this issue was considered by REALTORS®.

Legislative/Regulatory Status/Outlook:
On September 20, 2007, Representatives Brad Miller (D-NC) and Linda Sanchez (D-CA) introduced H.R. 3609, the “Emergency Home Ownership and Mortgage Equity Protection Act of 2007.” H.R. 3609 amends the Bankruptcy Code to remove the anti-modification provision for mortgages secured by principal residences and permits modified home loans to be repaid beyond the term of the Chapter 13 plan. Representative Steve Chabot (R-OH) has also introduced a bankruptcy reform measure, H.R. 3778, “Home Owner’s Mortgage and Equity Savings Act” or “HOMES Act,” which allows modifications on a debtor’s principal residence while placing limits on the types of loans. H.R. 3778 would also sunset after seven years.

On December 12, 2007, the House Judiciary Committee held its markup of H. R. 3609. Many amendments were offered, but none passed. Some issues that might be re-addressed as the bill moves towards full House consideration are putting a cap on the amount of principal allowed to be crammed down and making sure that the changes are not used as a mortgage tool and only as a last resort.

In the Senate, two different bankruptcy bills have been introduced. On October 3, 2007, Senator Durbin (D-IL) introduced S. 2136. S. 2136 is similar to H.R. 3609 and would amend the Bankruptcy Code and allow judges to modify loans. Also on October 3, 2007, Senator Specter (R-PA) introduced S. 2133, which amends the Bankruptcy Code and allow mortgages to be included in Chapter 13 filings, but restricts a judge’s ability to modify the principal of the mortgage. However, S. 2133 would permit a bankruptcy judge to stop or delay an interest rate increase, roll back interest rates, and eliminate early prepayment or prepayment penalties. No date has been set yet for the Senate Judiciary Committee to mark-up either bill.

The chance of any of these mortgage bankruptcy reform bills being enacted as introduced is very slim.

You must be logged in to post a comment.