Thursday, February 19, 2009

Prospects for Bankruptcy Mortgage Modification After Obama's February 18 Speech on the "Homeowner Affordability and Stability Plan"

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

President Obama, as anticipated, included a reference to the pending bankruptcy mortgage cramdown legislation in a major speech yesterday presenting his "Homeowner Affordability and Stability Plan." It was a short reference--three sentences in his presentation of his multi-pronged plan to address the foreclosure crisis, perhaps soft-pedaled because it is controversial. Congressional Democratic leaders now say they intend to introduce a major housing package next week incorporating the President's initiatives, including the cramdown bill. The House version of that bill, HR 200, The Helping Families Save Their Homes in Bankruptcy Act of 2009, was passed, with amendments, by the House Judiciary Committee on January 27, 2009.

President Obama's Speech
According to a transcript of his Feb. 18 speech ("as prepared for delivery"), Obama said:
Fourth, we will pursue a wide range of reforms designed to help families stay in their homes and avoid foreclosure.

My administration will continue to support reforming our bankruptcy rules so that we allow judges to reduce home mortgages on primary residences to their fair market value – as long as borrowers pay their debts under a court-ordered plan. That's the rule for investors who own two, three, and four homes. It should be the rule for ordinary homeowners too, as an alternative to foreclosure.
A three-page "Executive Summary" of the "Homeowner Affordability and Stability Plan" provided by the White House contained one sentence on the issue: "Allow Judicial Modifications of Home Mortgages During Bankruptcy for Borrowers Who Have Run Out of Options"

Congressional Intentions
According to an article yesterday in CQ Politics (by Congressional Quarterly, Inc.), HR 200 as "marked up" and passed by the House Judiciary Committee "is expected to make up a portion of the major housing package." According to this source the House Financial Services Chair Barney Frank and Senate Banking Committee Chair Christopher Dodd "have come to an agreement in principle on the package," which Frank "expects the bill on the floor sometime next week." An earlier article in the Washington Post also cited Barney Frank as the source for similar information.

Other Developments
An article was recently published in the Harvard Law and Policy Review unabashedly promoting Chapter 13 mortgage cramdown. Its author is Adam J. Levitin, an associate professor at Georgetown University's law school. He is becoming a vocal and often-quoted proponent of the legislation. He testified at the House Judiciary Committee's hearing on January 22, and his 27-page written testimony there is an excellent both scholarly and very readable argument in support of mortgage cramdowns, especially in its refutation of the positions of the credit industry. This Harvard Law and Policy Review article is a much shorter--9 page--and still excellent explanation of the problems with non-bankruptcy modifications, reasons why the Chapter 13 option is necessary, and reasons why the detractors are wrong.

Creditor organizations continue to vigorously oppose the legislation. After the President's speech, the Mortgage Bankers Association issued a press release which included the following:
David Kittle [MBA's Chairman] added the following regarding the proposal to allow bankruptcy judges to treat the underwater portion of the mortgage as unsecured debt:

“We are disappointed to see the President endorse bankruptcy as a means to help delinquent borrowers. Our fear is that any borrower who can’t be helped by this program will have a hard time being helped by bankruptcy. So their bankruptcy plan will fail, they will lose their home anyway, and will now be stuck with the black mark of bankruptcy on their record; inhibiting their ability to buy or rent a home in the future.”

And an article of a few days ago by the conservative Heritage Foundation titled "Mortgage Modifications in Bankruptcy Would Undermine Homeownership, Prevent Few Foreclosures" addresses the following five "myths":
  1. Current law provides no relief from fore­closure for primary residences.
  2. Allowing strip-down will not increase the cost or reduce the availability of mortgage loans.
  3. The Bankruptcy Code allows mortgages on vacation homes, boats, and expensive cars to be stripped down.
  4. Allowing strip-downs will help consumers.
  5. Allowing strip-downs will help the economy.
However, as of yet even creditor organizations concede, publicly and privately, that bankruptcy mortgage cramdown in some form will very likely pass into law in the current legislative session.

The next Bulletin updating this legislation will be published on this website-- soon as there is any new activity in Congress, likely by late next week.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys