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.
Congressional Leaders may drop the “Cram-Down” provision if it threatens the passage of the overall banking bill. Recently, at a Christian Science Monitor Breakfast, Senate Majority Leader Harry Reid stated, “If we can’t get the votes for that, and I am hopeful we can – I am semiconfident we can – then what I’ll do is take that off [the bill] and do the other banking provisions”. Currently the legislation is facing stiff opposition in the Senate from Republicans and moderate Democrats who are pushing for a watered down version of the cram-down provision. Senate Republicans and moderate Democrats led by Senator Evan Bayh and Senator Arlen Specter are pushing a version of the cram-down provision that applies only to homeowners with subprime loans. There reasoning is that the subprime problem has done enough damage to the banking industry.
The cram-down provision in Obama’s plan is designed to encourage lenders to modify at-risk mortgages so that they are more affordable to struggling homeowers. The plan gives lenders who voluntarily modify loans a cash bonus of $1,000 for each loan modified. For now lenders will have to hold their breath a little longer as the Senate futher debates the specifics of the cram-down provision.
H.B. 1106 attempts to limit the mortgages that may be ìcrammed downî or otherwise modified. It permits modifications only on loans that were originated before the billís enactment. A case may not be reopened to modify a mortgage. These are substantial (however, debtors are not prevented from filing a new case).
Several provisions are designed to discourage debtors that would file bankruptcy solely to modify their mortgage, but they may not be effective. Thirty days before filing, a debtor must contact the mortgage holder or servicer for a modification. The creditor must be provided with the same schedules and statement of financial affairs that would be filed in bankruptcy. While this would give the creditor some needed information to consider a modification, some issues arise immediately.
While the debtor is required to contact the lender 30 days before filing, it is not clear that the debtor must also provide the information within that thirty-day period. Consider the scenario where a debtor writes a letter requesting modification thirty days before filing, but does not provide the creditor with the required information until one day before filing. Is this a good faith issue that would result in a denial of confirmation? Even if the information is provided thirty days before filing, is this enough time for a creditor to consider a modification? Finally, because debtors must prepare their bankruptcy documents while seeking modification, doesnít this encourage bankruptcy filings? Moreover, debtors that are facing a foreclosure sale on their residence within thirty days after filing a bankruptcy are exempted from these requirements.
The Senate Bill would permit far more modifications at this point, but is expected to also place some limits on filing. We will advise you of any changes to the Senate Bill as they arise.
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.
Obama’s Homeowner Affordability and Stability Plan attempts to offer assistance to as many a 7 to 9 million homeowners under the three (3) programs. For the next three days, WWR will provide a breakdown of each of the programs. The three (3) programs will affect the following:
Part I: Treasury Partnered Loans
Part II: Loans in Bankruptcy
Part III: Holders of Fannie Mae/Freddie Mac Loans
Even if you do not have a loan as described above, it is important to understand the administration’s initiative. The administration is attempting to regulate the industry by using certain guidelines. They are working with regulators and federal/state agencies to implement the March 4, 2009 proposed guidelines, “across the entire mortgage market.”
Treasury Partnered Loan Modifications (Did you accept the government’s money)
1. Who is an eligible debtor under the Treasury Partnered Program?
- Debtors with a “high combined mortgage debt compared to income;”
- Debtors who have property “underwater;”
- Debtors who are current with their mortgage but are at risk of “imminent default;”
- Debtors who occupy the home; or
- Debtors that have mortgage up to the “Freddie/Fannie conforming limits”
Further, any debtors that are eligible must agree to enter into a consumer debt counseling (HUD-certified) if their total debt is equal to 55% or more of their income.
2. What will the Lenders have to do?
- The lender will reduce the interest rates to a “specified affordability level” (mortgage payment is no greater than 38% of debtors’ income)
- The initiative will match (dollar-for-dollar) further reduction in interest payments (down to 31% DTI).
- Lender will keep the modified payments in place for five years
- Lender can bring down the monthly payments to the target level by reducing the mortgage principal
3. What are the incentives for Lenders and/or Servicers?
- Servicers will receive $1,000 for each modified loan and as much as $1,000 for three years if the borrower remains current
- Mortgage lenders will also be given incentives for modifying loans for “at risk” borrowers. Sevicers will receive $500 while loan holders will receive $1,500 to modify loans
- To prevent foreclosures, mortgage holders modified under the program would be provided with “additional insurance payment on each modified loan, linked to declines in the home price index”
4. What is the incentive for the Debtor?
- Lower monthly payments
- Homeowners will be able to receive up to $5,000 remaining current on their loans for five years
5. What other requirements are for servicers?
- Any servicer participating in the program will be required, “to report standardized loan-level data on modifications, borrower and property characteristics, and outcomes”
6. What are the alternatives to modification?
- Lenders will receive incentives for avoiding foreclosure, i.e. short sales, and Deed-in-Lieu of foreclosure if modifications do not work
