Mortgage Modification Legislation Proposed

By Areya Holder
Spring 2009

Senate Bill 61 and House Bill 200 as introduces on January 6, 2009 were identical. However, the version of the proposal passed by the House Judiciary Committee has a few changes from the original version, notably that cram-downs are eligible only for existing mortgages and a requirement that borrowers contact their lenders at least 30 days prior to filing bankruptcy. Additionally, any proceeds of any property sold within five years must be shared with the lender, and borrowers proven to have committed fraud to obtain their loans are restricted from eligibility. The bill in the Senate was sponsored by Richard Durbin, and the bill in the House was introduced by John Conyers.

The Helping Families Save their Homes in Bankruptcy Act of 2009 amends the Bankruptcy Code to allow judges to modify the terms of a home mortgage in foreclosure. This legislation removes an arguable anomaly under the code that allows the modification of virtually all types of debt in bankruptcy except home mortgages.

So what does the bill propose to do? The Legislation specifically addresses the needs of a Chapter 13 debtor's principle residence under §506(a) and 1322(b).

Advocates of this Legislation believe that it will provide much needed relief for homeowners who are on the brink of losing their homes. Critics of the legislation argue that the bill will increase interest rates on future mortgages even for people with excellent credit and create huge loses for already trouble banks.

Please note the mortgage cram down provision is not in President Obama's stimulus package; however, President Obama has promised to sign the proposed bankruptcy bill.

The essential provisions of the bills are as follows:

Eligibility for relief under 11 U.S.C. §109(e)
Section 109(e) of the bankruptcy code currently sets forth the ceiling for both secured and unsecured debts for Chapter 13 debtors. The current debt limits for filing Chapter 13 are a) unsecured debts less than $336,900.00 and b) secured debts of less than $,010,650.00. Te proposed legislation would amend §109(e) and exclude from the computation of debts the secured or unsecured portions of: (1) debts secured by the debtor's principle residence if the current value of that residence is less than the secured debt limit; or (2) debts secured of formerly secured by debtor’s principle residence that was either sold in foreclosure or surrendered to the creditor if the current value of such real property is less than the secured debt limit.

In addition, the bill excludes the requirement of credit counseling for a debtor who submits to the court a certification that the debtor has received notice the holder of a claim secured by the debtor’s principle residence may commence a foreclosure on the debtor's principle residence.

Prohibiting Claims Arising from Violations of Consumer Protection Laws
Next, § 502(b) is amended to insert a new subsection (10) that sets forth restrictions and prohibitions on claims arising from violations of consumer protection laws. The new subsection (10) states the claim is subject to any remedy for damages or rescission due to violations of state or federal consumer protection law, including the Truth in Lending Act, notwithstanding the prior entry of a foreclosure judgment.

Mortgage Modification
The meat of this bill though is contained in section 4 of both the House and Senate versions which amends § 1322(b) of the Code. This section allows for the modification of the rights of claim holders, in the event of a foreclosure notice for a chapter 13 debtor, among other means by: (1) reducing a claim to equal the value of the debtor’s interest in the residence securing such claim, i.e., providing for payment of the amount of the allowed secured claim as determined under § 506(a)(1);(2) allows for an interest rate adjustment; and (3) extending the repayment period for a maximum loan extension of 40 years less the period the loan has actually been in effect.

Combating Excessive Fees
Section 5 of the proposed amendment further amends § 1322 and denies debtor liability for certain fees and charges incurred while the bankruptcy case is pending and arising from a debt secured by the debtor’s principle residence, unless the claim holder observes specified requirements.

Additional Requirements of Confirmation
Section 6 amends §1325 of the code and adds to conditions for court confirmation: (1) the holder of a claim secured by the debtor’s principle residence retain the lien securing the claim until the later of the payment of such claim as reduced and modified or the discharge of a debtor from all debts; and (2) the plan modifies the claim in good faith.

Exclusions from Discharge
The bill excludes from final discharge: (1) any payments to claim holders whose rights are modified under § 1322(b)(11): and (2) any unpaid portion of an allowed secured claim as reduced.

Potential Problems:

1. What happens to the modified mortgage if the debtor’s case is dismissed? Under § 349(b), “Unless the court, for cause, orders otherwise, a dismissal of a case other than under § 742 of this title –
   1. reinstates – (A) any proceeding or custodianship superseded under § 543 of this title; (b) any transfer avoided under § 522, 544, 545, 547, 548, 549, or 724(a) of this title or preserved under § 510(c)(2), 522(i)(2), or 551 of this title; and (C) any lien voided under § 506(d) of this title; 2. vacates any order, judgment, or transfer ordered, under § 522(i)!9), 542, 550, or 553 of this title; and 3. revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title. According to the House and Senate Reports from Reform Act of 1978, the basic purpose of this subsection is to undo the bankruptcy as far as practicable and to restore all property rights to the position in which they were found at the commencement of the case. Thus, practically speaking, when a case is dismissed, generally, any modification or restructuring under chapter 13 is effectively nullified and things revert back to their pre-petition status as if the bankruptcy has never been filed. It is unclear from the proposed amendments whether this is Congress' intent for the mortgage modification provision or if that provision is meant to be a permanent restructuring of the note regardless of completion of chapter 13 plan payments.
2. Similarly, what happens if a debtor confirms a plan that contains a modified home mortgage, but converts to chapter 7 prior to completion of all chapter 13 payments? Does the debtor lose the benefit of the restructured mortgage because of the conversion? Again, the lasting effects of the modification provisions are unclear.
3. Who can take advantage of the proposed cram down provisions? Everyone in a chapter 13 bankruptcy? The language of the proposed act states that it applies to all chapter 13 bankruptcy cases filed "before, on, or after the date of the enactment of this Act". Logistically, how would that be effectuated? Could a debtor who has been in a chapter 13 plan for 4 years and is on the brink of discharge, modify his or her home mortgage just a few months before discharge in order to avail himself or herself of this new provision? It would appear so.

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