As The Helping Families Save Their Homes Act awaits a Senate vote, it has become apparent that the cram-down provision of the bill will likely not muster enough support to pass. The cram-down provision, which gives bankruptcy judges the power to modify principal balance and interest rates of mortgages, has faced intense opposition from the banking industry.
Last week, Sens. Dick Durbin (D-Ill.), Christopher Dodd (D-Conn.), and Charles Schumer (D-N.Y.) introduced two new bills. The bills are similar to H.R. 1106 -The Helping Families Save Their Homes Act- passed by the House, however one bill does not contain the judicial mortgage modification language known as the “cram-down” provision. The provision instead is likely to be voted on as an amendment to the act. It is predicted that all Senate Republicans and a few Democrats will oppose the cram-down provision. Sen. Mary Landrieu (D-LA.) is one of the Democrats who oppose the cram-down provision. Sen. Landrieu opposes the legislation out of concern for the possible affect on local community banks. A vote on the bill is expected within the next week.
While the House passed a bill permitting mortgage cramdowns, the Senate has yet to do so. However, it hopes to have a compromise in place this week. Senate Majority Whip Dick Durbin (D-Ill) met with banks, credit unions, and consumer groups to negotiate terms for the Senate bill.
Details are sketchy, but it appears that the terms would further limit the pool of borrowers who may be permitted to reduce the principal balance on mortgages in bankruptcy. If a lender offers a refinance that reduces the interest rate through the current Obama plan, a borrower may not be permitted to reduce the principal balance in a Chapter 13 plan. This is obviously an incentive for lenders to offer refinancing to certain borrowers in an attempt to avoid a reduction of the principal balance by a bankruptcy judge.
“At-risk low income borrowers” and those who spend less than 31% of their income on home mortgage payments would be ineligible as well for principal write-downs. The program would apply only to loans originated before 2009, and would end in 2014, thus limiting bankruptcy cram downs to approximately five years from enactment of any bill.
WWR will continue to keep you informed as this Senate bill takes form.
On Thursday April 16, 2009 RealtyTrac reported that foreclosure rates in March 2009 increased by 17% from February. The increase came as many mortgage lenders ended temporary moratoriums imposed on the filing of foreclosures. The March and first quarter totals also jumped 24% from a year ago and were the highest since RealtyTrac began reporting foreclosure rates. In the first 3 months of the year, 1 out of every 159 U.S. Households received a foreclosure filing, which includes a notice of default, auction sale or bank repossession. Filings were reported on over 803,000 properties in the first quarter of 2009. The states with the highest percentage of foreclosure filing were: California, Florida, Nevada, Arizona, and Illinois. Those 5 states accounted for nearly 60% of the U.S. foreclosure activity. Ohio still ranks in the top 10 for the states with the most foreclosure filings.
It seems that Congressional programs aimed at limiting the number of foreclosures have had little affect on lowering the rate of foreclosures. However, it may yet be too early to see results from these recently passed Congressional programs. In this market, lenders should continue to work with borrowers to modify loans for homeowners who are able to continue making payments. Working directly with borrowers is the most cost effective and efficient way to limit the damage of the worst housing market since the Great Depression.
With the current state of the economy and massive job layoffs, the number of Bankruptcy filings in the U.S. has surged. The Associated Press reported that over the last 12 months, there have been over 1.2 million bankruptcy proceedings filed. In March of 2009, there was an increase of 46% on the number of filings from March 2008. The largest percentage of increases in filings is from the Western portion of the United States: Arizona, California, Idaho and Nevada leading the way.
Many experts are predicting that this is just the start of the surge. Some early projections are for 1.5 million bankruptcies to be filed in 2009. This is despite the fact that the Bankruptcy Cramdown Legislation may have reached a roadblock in the Senate. Many experts also believe the increase will continue into 2010.
It will be a challenging time for both financial intuitions and debtors. Weltman, Weinberg & Reis will continue to keep you updated on Bankruptcy trends in order to allow creditors to be in a position to protect their interests in the current environment.
The Senate may leave the proposed cramdown legislation behind as it considers other remedies for the housing and mortgage meltdown.
The legislation would allow bankruptcy judges to modify certain home mortgage loans by reducing the principal, the payments, and/or the interest rates. The lending community has fiercely opposed it, and some lawmakers on both sides of the aisle are reconsidering their support of the bill.
Senate Majority Leader Harry Reid has indicated that he is willing to drop the cramdown provisions to focus on other housing measures such as creating new financial regulations and increasing measures to battle mortgage fraud. The Senate will reconvene on April 20, but it is doubtful that the bankruptcy cramdown legislation will be a priority.
