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.
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.
