Currently Congress is hammering out the details of a law that will change the Bankruptcy Code and grant bankruptcy judges the authority to cram down mortgage loans to the current market value of the real property and modify interest rates.  On February 17, 2009 Ohio representatives Mike Foley and Denise Driehaus introduced Ohio House Bill 3 in the 128th General Assembly.  House Bill 3 takes the mortgage cram down a step further as it gives state court judges the power to reduce the principal amount of a mortgage loan and adjust the interest rate on the loans for properties in foreclosure without the need to file bankruptcy.

The proposed legislation grants a “judge”, the discretion to reduce the principal amount of the loan if, (1) both parties would benefit from such a modification, (2) the court finds under all circumstances, the modification appears just and equitable, and (3) the modification would enable the borrower to make payments and retain the property. A judge may also reduce the interest rate of the loan to an amount the judge determines is just and equitable as long as reducing the interest rate would enable the borrower to make payments and retain the property. The cram down provision would be effective for three years after the passage of the legislation.

If this becomes law, it will be a tremendous inducement for lenders to work with borrowers who are behind on their mortgage payments rather than taking a chance with a state court judge who may be more interested in being re-elected than crafting an equitable solution for the lender.