To Modify Or Not To Modify – Mortgage Loan Mods In Chapter 13 Bankruptcy? The Debate Continues

Here is an article that appeared in yesterday’s Congressional Quarterly with an update on the mortgage modification legislation:

Feb. 23, 2009 – 5:05 p.m.
House Package Addressing Foreclosure Crisis to Reach Floor on Thursday

By Phil Mattingly, CQ Staff

A major housing package aimed at continuing the assault on the cascading foreclosure crisis, including a controversial bankruptcy provision, will be on the House floor on Thursday, the top House Democrat said Monday.

Speaker Nancy Pelosi, D-Calif., announced her intention to bring to the floor a bill (HR 1106) that would make permanent an increase in the insurance limit for the Federal Deposit Insurance Corporation, overhaul a federal program created to help borrowers in danger of losing their homes refinance into new government-backed loans and provide a “safe harbor” to mortgage servicers that participate in mortgage modification programs.

But perhaps most controversial are provisions that would allow bankruptcy judges to write down the principal and interest rate of loans for people whose mortgages are higher than the value of their homes. Stemming from legislation (HR 200) marked up by the House Judiciary Committee in January, the language also would allow judges to extend the life of such loans for terms of up to 40 years.

The financial services industry has bitterly fought the idea, often referred to as a “cramdown,” but the momentum of a supportive president and escalating housing crisis appeared to have turned the tide of the battle. With Citigroup leading the way, several industry groups have indicated a compromise was likely, so long as some concessions were made in the final language of the bill.
But the text of the legislation, which was released Monday, has left the banking industry frustrated and strong in opposition.

“We continue to be opposed to the broad bankruptcy bill,” said Scott Talbott, the senior vice president of government affairs at the Financial Services Roundtable, an industry group that represents 100 of the largest financial companies.

The bill does contain tighter language dealing with loans obtained from the Federal Housing Authority, Department of Veterans Affairs and Rural Housing Services, allowing, under certain circumstances, the Treasury Department to cover the unpaid balance, insurance or losses caused by the modified loan.

But that language was not enough to mollify critics of “cramdown” legislation.

The package is expected to work in concert with the housing initiative announced by the Obama administration on Feb. 18, encompassing several of the goals that the president outlined, but could not apply without legislative action.

The bill would overhaul legislation enacted last year (PL 110-289) creating the Hope for Homeowners program. That program, intended to help 400,000 troubled homeowners, has floundered due to rigid application standards. The changes would include placing Shaun Donovan, secretary of the Department of Housing and Urban Development, in charge of the program, permitting payments to existing servicers of up $1,000 for each successful refinance and changing the upfront participation fee to up to 2 percent – down from 3 percent – and the annual fee to up to 1 percent, down from a maximum of 1.5 percent.

The bill also would make permanent an FDIC increase to $250,000 from $100,000 and increase the regulator’s borrowing authority to $100 billion from $30 billion

The House Financial Services Committee marked up the three non-bankruptcy bills on Feb. 4. Staff from both panels – Financial Services and Judiciary – have pushed hard in recent weeks to complete the final language on a package that has been a stated goal of House Financial Services Chairman Barney Frank, D-Mass., since the start of the 111th Congress.