Bankruptcy bill vote in Senate on 4/30/09

The Problem

Credit Suisse estimates that as many as 1 in 6 mortgages in America will be lost to foreclosure in the next four years. Each foreclosure is a tragedy for the family thrown out on the street. But these failing mortgages have also destroyed the global financial markets by severely damaging the value of the securities that are based on them. Even though trillions of American taxpayer dollars have been allocated towards reducing the threat that these “toxic” assets will bring down the global financial system, the risk of further economic destruction will remain until the underlying mortgages that are the root of the problem are stabilized. Helping families save their homes is one of the most urgent moral and economic imperatives that America faces.

The Solution

The Senate will soon be given the opportunity to help solve this crisis by preventing 1.7 million mortgages from falling into foreclosure and preserving over $300 billion in home equity for neighboring homeowners who have made each of their own mortgage payments on time (according to estimates from Moody’s Economy.com and the Center for Responsible Lending). The Durbin amendment to the Helping Families Save Their Homes Act would finally create the necessary incentives such that failing mortgages would be voluntarily restructured on the scale that is required to turn the economy around, and is the most important step that Congress can take in helping to implement the Obama Administration’s Homeowner Assistance and Stability Plan. The objective of the amendment is to encourage the servicers of troubled homeowners to offer aggressive loan modifications that would keep families in their homes, which compared to the only other alternative – foreclosure – is more profitable for the banks, more secure for the families, and more stable for the surrounding neighborhoods. It would do so by allowing borrowers at risk of foreclosure to receive assistance from the bankruptcy courts in restructuring that loan, but only if the servicer of that loan has not offered to modify that loan outside of court. The amendment would not cost the American taxpayers one penny.

How It Would Work

Specifically, if a servicer provides either a modification offer that complies with the Obama Administration’s Homeowner Affordability and Stability Plan that reduces the family’s monthly payment to 31% or less of their income, or a refinancing offer that complies with the Hope for Homeowners program as modified by this housing bill, that offer would preclude a borrower from receiving a primary mortgage modification in bankruptcy (low income borrowers must be offered a more aggressive modification for the servicer to maintain the veto). In addition, only primary mortgages originated before 1/1/09, with outstanding principal less than $729,750, that are at least 60 days delinquent, and for which a foreclosure notice has been sent could be modified in bankruptcy.

For those borrowers that do not receive a modification offer from their servicer, that meet all of the other criteria above, and require assistance in bankruptcy, the courts could only reduce the loan principal to fair market value (which is more than the lender would collect if the home is sold in foreclosure), reduce the interest rate to the conventional rate plus a reasonable premium for risk (which at the moment would equal around 6.5% to 7%), and lengthen the term to the longer of 40 years reduced by the period for which the mortgage has been outstanding or the remaining term of the mortgage. If the loan principal is reduced in bankruptcy, the borrower must evenly split any price appreciation with the lender up to the original principal amount if the home is sold while the borrower is still in bankruptcy. These bankruptcy provisions would sunset when the Housing Affordability and Stability Plan ends in 2012.

Support

The amendment is supported by Citigroup, AARP, Consumer Federation of America, Leadership Conference on Civil Rights, AFL-CIO, SEIU, Center for Responsible Lending, National Association of Consumer Bankruptcy Attorneys, and dozens of other groups.