June 2009 Newsletter

1. Proposed Legislation Permitting First Mortgage Cram Downs Under § 1322(b)(2)

On Thursday, April 30 2009, the United States Senate voted against a controversial bill that would have empowered Chapter 13 Bankruptcy judges to reduce first mortgage principal balances on primary residences to better reflect their current values. The proposed legislation referred to as the mortgage “cram-down” law had previously passed the House of Representatives with a vote of 234-191. Although the bill seemed to be great news for people living in high foreclosure states like Florida where property values have plummeted, it is important to understand that not all debtors would have been presumptively eligible to modify home loans under the new law. What the bill proposed on its face was the removal of the anti-modification provision of 11 USC 1322(b)(2), which presently disallows modification of claims secured by the debtor’s primary residence.

However, the bill also set forth several requirements intended to prove that a debtor was unable to cure arrears and maintain monthly mortgage payments as they come due in the future. For example, the homeowners needed to show that they had tried to negotiate a voluntary loan modification with their lender. Another amendment required that the Bankruptcy Judges verify that a homeowner actually sought a modification before entering the bankruptcy process and the same Judges would haveto perform a balancing test involving a person’s income and their monthly mortgage payments before deciding whether an interest rate reduction was feasible. If after these guidelines were met leaving a debtor with the opportunity for a principal reduction, Bankruptcy Judges would then have to use Federally approved appraisal guidelines to determine a home’s current market value and there was a cap on the amount a mortgage could actually be reduced.

As such, although the proposed legislation seemed promising and would have likely helped many homeowners, it wasn’t necessarily going to provide relief for all those who turned to Bankruptcy in an effort to save their home. Now, as this has become a moot point, we will need to wait and see if and when the bill is going to be reworked for a comeback.

2. The Obama administration expanded its $50 billion mortgage aid program.

On Thursday, May15, 2009 the Obama administration expanded its $50 billion mortgage aid program, announcing new measures that would help homeowners avoid a foreclosure if they don’t qualify for other assistance. The initiatives announced Thursday are aimed at ineligible homeowners: borrowers who are unemployed or owe significantly more than their homes are worth.
Generally, there are two options for them to avoid foreclosure. The homeowner can sign the property title over to the lender in what is known as a deed in lieu of foreclosure. Or, with the lender’s permission, the homeowner can sell the property for less than the value of the loan through a short sale.

Short sales are often seen as preferable to foreclosure because they don’t harm a borrowers’ credit record as much as a foreclosure. The new program would install standards that would speed the process for buyers and sellers by making it more efficient. Under the plan, incentives would be provided for mortgage servicers and borrowers to pursue short sales. Financial incentives include $1,000 to servicers for a successful short sale, and borrowers may receive up to $1,500 to assist with relocation expenses.

So far, 14 companies have signed up and will be paid for each loan they modify. And to further entice mortgage companies to participate, the government is offering payments totaling up to $10 billion to compensate them for the risk of falling home prices.

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