Sen. Evan Bayh (D-Ind.) stated that currently there is not enough support to prevent a filibuster, or “talking out a bill”, of the proposed legislation, which would allow mortgages to be restructured through a Chapter 13 filing. Currently, the legislation proposes to: 1) modify the principal of a mortgage to the fair market value of the property; 2) adjust the interest rate of the mortgage; and 3) extend the terms of the mortgage loan out to 40 years.
Senate Majority Leader Harry Reid is working with Judiciary ranking member Arlen Specter to narrow the eligibility for borrowers who could take advantage of the “cramdown” provisions. The debate in Congress currently revolves around whether an eligible homeowner offered a “qualified” loan could still take advantage of a “cramdown” if they did not take the offer for a “qualified” loan workout. The legislation, which passed the House, did not mandate that the borrower had to take such an offer if eligible, in lieu of a “cramdown”. Senate moderates are pushing for a mandatory requirement that borrowers try to modify their mortgage with lenders before seeking help in bankruptcy court or they will not be eligible for “cramdown”.
To overcome a filibuster, the Senate must have 60 votes to invoke cloture and end debate on the Bill or it will be defeated. For now, debate on the Bill will be put on hold until after the Senate’s April recess ends on April 19th, 2009.
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.
