Last night, the House of Representatives approved H.R. 1106 by a vote of 234-191, permitting bankruptcy judges to cram down residential mortgages to their current value, modifying variable interest rates to a fixed annual rate and extending the repayment period of up to 40 years. This part of the bill contains identical language to other bills pending in the House. One big change is a built in sunset provision; the only loans that can be modified are those dated before the statute takes effect. Future loans may not be modified under this statute. In addition, the debtor must certify that he or she has attempted to contact the lender regarding modification of the mortgage at least 15 days before the petition is filed, unless a foreclosure sale is scheduled within 30 days. If a foreclosure sale is pending or if the debtor wants to modify a mortgage covered by a confirmed plan, the debtor must first attempt to contact the lender and try to work out a loan modification. Nothing in the statute explains how the debtor is to prove that the attempt to contact the lender was actually made.
The legislation would be immediately effective and would apply to all pending, but not closed, cases. The value of the property is the value as of the hearing date, not the date the petition was filed. This would give debtors the option to ask for mortgage cram downs on plans that have already been confirmed, even those that are four years old. The only limitation on the provision is that the court must determine that the debtor has proposed the modification in good faith and that the debtor has not been convicted of obtaining the extension, renewal or refinancing of loan by actual fraud.
If the debtor sells the house for more than the crammed down value within five years, the lender would share in the net proceeds.
The Chapter 13 trustee’s fee on modified loans is capped at 4%, which will encourage more debtors to make regular mortgage payments through the trustee. The court may also waive the trustee’s fees for certain low income individuals.
Furthermore, there are provisions that protect servicers who agree to modify mortgages from liability to owners of interests in securitized loans. The terms of some securitization agreements will be changed, declaring certain provisions to be against public policy. This could have the effect of allowing many servicers to go forward with loan modifications, which have not been possible in the past.
All eyes are now on the Senate. If the legislation that passes in the Senate is not identical to the House version, the bills will go to a conference committee to hammer out a compromise. The compromise bill would then go back to both houses for approval and then to the President for signature.
One of the key components of the “Helping Families Save Their Homes in Bankruptcy Act of 2009”, currently pending in Congress, is a provision allowing a borrower to extend the repayment period on their mortgage loan for up to 40 years. While such a provision appears straightforward at first glance, Congress to date has failed to indicate whether a borrower will need to actually complete their Chapter 13 plan and receive a discharge in order to enjoy the benefits of the modified terms for the remainder of the loan. In other words, what if a borrower seeks Chapter 13 relief, modifies the loan term and then has his case dismissed 6 months later for failing to stay current on plan payments? Does this cancel the loan modification?
Another unanswered question centers on how many “bites at the apple” a borrower gets to utilize for this loan extension provision. What if, hypothetically, a borrower with a 30 year fixed rate loan files for Chapter 13 relief, modifies the loan term out to 39 years and completes his plan in 3 years. Then, the same borrower files a second Chapter 13 case 3 years later and attempts to recast the loan back out to 34 years?
The answers to these questions will have dramatic effects upon the mortgage lending industry and how it assesses risk going forward for all potential borrowers. Congress should take these issues to heart in determining the final version of the Bill, lest it create more problems for the public than it seeks to solve.
Section 109 of title 11, United States Code, is amended–
(2) by adding at the end of subsection (h) the following:
`(5) The requirements of paragraph (1) shall not apply in a case under chapter 13 with respect to a debtor who submits to the court a certification that the debtor has received notice that the holder of a claim secured by the debtor’s principal residence may commence a foreclosure on the debtor’s principal residence.’.
One of the hallmarks of the 2005 BAPCPA amendments is that all potential Chapter 7 and Chapter 13 debtors are required to receive credit counseling before they file for bankruptcy. Failure to do so results in an automatic dismissal of the case if they received a notice a lender may foreclose on their home.
However, with this amendment, debtors who receive a notice of foreclosure do not have to take the pre-bankruptcy credit counseling.
Issues
- What is a “notice” that a home may be foreclosed upon? There is no requirement in the statute that the notice be in writing. Is a phone call a notice? The certification required by the court may be as simple as a debtor’s affidavit that a lender might commence foreclosure.
- It is anticipated that the courts will be liberal in the interpretation of a “notice.”
- What about states that have non-judicial foreclosures? – the letter of default may be the commencement of foreclosure.
- The effect of this is to remove the cost of the counseling from the cost of filing bankruptcy, and eliminate a step, thereby hastening the filing of a bankruptcy case.
