Monday, April 20, 2009

A Busy Senate Easter Break for the Bankruptcy Mortgage Cramdown Legislation

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

After a few days of quiet early in the Congressional two-week Easter break which ended this last weekend, reliable details are now emerging about the intense negotiations on the bankruptcy mortgage cramdown legislation among Senators and their staff during the break. After the Senate leadership decided in mid-March not to bring a bill to the floor for a vote before the break (see my earlier Bulletin on this), rumors arose that the legislation was in serious trouble. Indeed there is more doubt now that a bill will pass Congress than at any time since the beginning of the session. All indications are that at the least the bill that passed the House of Representatives on March 5 will not pass the Senate without significant changes. However, the vigorous horse-trading of the last week or two which has now come to light--occurring even while Congress was not in session--shows that the legislation is very much alive. But whether any bill will pass in the Senate, and then survive in a conference committee to resolve the almost certain differences from the House bill, is still impossible to predict.

If a bill does emerge into law, some of its most important provisions will be shaped by how Congress resolves the issues which were the subject of the last few days of negotiation, as follows:

1) Potential Restriction to Subprime Mortgages

On April 16, a spokesperson for Senator Richard Durbin, sponsor of the Senate bill and the Senate Majority Whip, said that one of the main points of contention is whether to limit bankruptcy cramdowns to certain kinds of mortgages, at the extreme end only to subprime mortgages. Indications are that such a severe restriction is unacceptable to Sen. Durbin. In contrast, the bill passed by the House has no such restriction, in that it is applicable to any mortgage "secured by a security interest in the debtor’s principal residence that is the subject of a notice that a foreclosure may be commenced with respect to such loan." (See my prior Bulletin on the key terms of the bill passed by the House.)

2) Potential Restriction to Mortgages of Limited Time Periods, Limited in Amount

Bankruptcy mortgage modifications are limited in one compromised version to loans originated before 2009, and with a balance of less than $729,750. The modification provisions would expire in 2014. In contrast the House-passed version would include loans "originated before the effective date" of the law, thus including those entered into so far this year. And importantly there is no explicit maximum loan balance in the House bill, and no sunset clause.

3) Restrictions Related to Non-Bankruptcy Mortgage Modifications

Before its early March passage, the House bill had been delayed by and then amended at the behest of a group of self-styled "moderate" Democratic Representatives. This amendment required bankruptcy judges in certain circumstances to consider whether a non-bankruptcy loan modification consistent with President Obama’s Homeowner Affordability & Stability Plan had been offered to the homeowners before their Chapter 13 case was filed. For more details on this provision, see my earlier Bulletin titled The Terms of the Bankruptcy Mortgage Cramdown Bill Passed by the House of Representatives--The Cramdown Itself. A potential Senate compromise would convert this limited and at least somewhat discretionary standard and turn it into a explicit restriction: if a lender offered a modification through the Obama plan or last year's Hope for Homeowners Act program called the Hope for Homeowners Act, the homeowner would be ineligible to modify their loan through bankruptcy.

Another related potential compromise: if a homeowner ended up paying a quarter of income or less for the mortgage under a non-bankruptcy modification under the Obama plan, he or she would not be eligible for a bankruptcy modification.

4) Limits on Principal Reduction

Mortgage holders have been highly resistant to lowering principal balances, in large part because they do not want to lose any more discretion on how to value such assets. This issue is one that is near the heart of the mortgage crisis. A potential compromise in discussion among Senate negotiators would not allow mortgage principal reductions for certain low-income borrowers who pay less than 31 percent of their income for their mortgage payments. Instead they could only have their interest rates reduced or their loans amortized over a longer time.

5) 50-50% Split of Residential Sale Proceeds

In mortgages where the principal is reduced by a bankruptcy judge and the residence is then sold during the Chapter 13 case for more than the court-determined value, one possible Senate compromise would have the mortgage holder and homeowner evenly split any such profit. This is actually less generous to mortgage holders in some respects than the House bill. The House version's annually graduated schedule pays to the mortgage holder 90% of such potential profit during the 1st year of the Chapter 13 plan, 70% the 2nd year, 50% the 3rd year, 30% the 4th year, and 10% the 5th year.

Current Prospects in the Senate

Max Gleischman, Senator Durbin's spokesperson, said on April 8 that the bill in the form that passed the House bill in March “doesn’t have the votes to pass the Senate.” So the pressing question is what compromises will be struck in the next few days to come up with a bill which the leadership believes will pass. According to an April 16 CongressDaily / article, "Democrats hope to move the measure this month with a deal in place."

Congress is scheduled to reconvene on Monday, April 20. Prospects are that the negotiations will only intensify.

Addendum: Potentially Influential Report for the Senate Debate

Mr. Gleischman says that Senator Durbin sought independent analysis of the controversial issues behind his mortgage cramdown proposal from, among other sources, a Credit Suisse/Fixed Income Research report of late January 2009. It is titled "Bankruptcy Law Reform – A new tool for foreclosure avoidance." Given how extensively this respected research organization's earlier study on the projected number of upcoming foreclosures was cited by the press and by many governmental decision makers, I anticipated this new report's similar impact. See my prior Bulletin titled New Report by Influential Credit Suisse Cautiously Supportive of Chapter 13 Mortgage Cramdown Legislation. This study goes to the heart of the issue: the potential effectiveness of Chapter 13 residential mortgage cramdowns and their potential effect on future mortgage credit markets. It is highly worthwhile reading.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

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