BankruptcyProf Blog

Cramdown Hearings Thursday July 23, 2009

NOTICE OF SUBCOMMITTEE HEARING
The Senate Committee on the Judiciary, Subcommittee on Administrative Oversight and the Courts will hold a hearing entitled " The Worsening Foreclosure Crisis:  Is It Time to Reconsider Bankruptcy Reform?" on Thursday, July 23, 2009 at 10:00 a.m. in Room 226 of the Senate Dirksen Office Building.

Chairman Whitehouse will preside.
By order of the Chairman

California Residential Mortgage Foreclosure Moratoriums Went Into Effect on June 15, 2009

The bill can be found here.  The regs can be found here.  Borrowers get an additional 90 days if the lender has not implemented a sufficent loan modification program.     

The California Dept of Corporations information including FAQs and the Application for an exemption can be found here. 

Update on Cramdown Bill in the Senate

The Washington Post article today by Renae Merle can be accessed here.  Lenders are putting up a pretty good fight in the Senate.  Among the concessions demanded is a sunset provision in 2014 when the legislation will end, and a requirement that the debtor accept a loan modification without cramdown if offered.  What's most interesting is who is not negotiating.  "[T]he Mortgage Bankers Association and American Bankers Association, major industry groups, are not part of the current negotiations, and congressional Republicans continue to resist the provision."  "The Independent Community Bankers of America had been observing the negotiations, but walked away last week, said Camden Fine, president of the group. 'Basically we were told by the senators that are involved that we either had to agree in principle to some sort of cramdown provision or we couldn't stay in the room,' Fine said. 'And we could not agree to that because we don't agree in principle.'"  
  

Mortgage Modification Bill in Senate Not Looking So Good

Thanks to Eric Clark

From the American Bankruptcy Institute 4/9/09

MORTGAGE MODIFICATION, EXECUTIVE COMPENSATION LIKELY TO BE DROPPED FROM SENATE AGENDA

Senate Democratic leaders appear likely to drop several high-profile legislative issues from their agenda, including efforts to tax bonuses paid to corporate executives and giving bankruptcy judges the ability to reduce mortgage payments on the primary mortgages of chapter 13 debtors, according to a CongressDaily report today.

Senate aides said that the legislative agenda this year might increasingly focus on revamping financial regulations -- which could reach the Senate floor in late  summer -- and on health care reform. The chamber will reconvene April 20 by taking up a fraud-e enforcement bill that authorizes increasing Justice Department funding and authority to crack down on mortgage fraud and other crimes related to federal assistance programs. Those efforts come as more high-profile legislation sits on the back burner in the face of opposition from Republicans and moderate Democrats. Senate Majority Leader Harry Reid (D-Nev.) and Senate Finance Chairman Max Baucus (D-Mont.) have said that they have not dropped efforts to craft a bill slapping heavy taxes on bonuses for firms such as American International Group that received bailout money, but Democrats have no immediate plans to move an AIG bill in the face of White House concerns and strong opposition from the banking industry. Also faltering is mortgage cramdown legislation that lobbyists and some senators say lacks the votes to pass. Reid has said previously that he is prepared to drop the cramdown language provision from a broader housing bill if the votes are not there.

Cramdown Bill to Come to a Vote in the House on Tuesday

HR1106, Helping Families Save Their Homes Act of 2009 can be accessed here. 

A summary (of the big stuff) is as follows:

1.  Secured debts where the collateral is the debtor's underwater home will not be included in the chapter 13 eligibility test in Section 109.  A debtor who has received notice from the lender that it may commence foreclosure will not have to do the credit counseling. 

2.  A pre-existing loan on the debtor's home where the debtor has been told by the lender that a foreclosure may be commenced, may be modified in a chapter 13 to pay only the secured portion per Sec 506(a)(1); provide for payment of the secured portion over 40 years at a fixed and reasonable interest rate.  If the home is sold before the chapter 13 discharge, the profit must be shared with the lender. 

3.  The debtor must certify in the chapter 13 that he attempted, at least 15 days before filing, to "contact the lender regarding modification" unless a foreclosure sale is scheduled within 30 days after the petition date.

4.  This applies to existing chapter 13 cases provided the debtor tries to work it out first before filing a request for modification. 

5.  To permit bifurcation of the secured claim, the court must find that the modification is proposed in good faith and the debt was not incurred by fraud. 

6.  The Effective Date is the date of enactment.

Update on Proposed Legislation

WASHINGTON -- House Democrats have pushed back until next week a vote on legislation to allow bankruptcy judges to reduce the principal balance of mortgage loans, after some in their party raised concerns about the measure.

Speaker Nancy Pelosi (D., Calif.) said the vote, which was scheduled for Thursday, will be postponed so that House Democrats can meet Monday evening with Housing Secretary Shaun Donovan to discuss the measure.

The vote is now likely to occur no earlier than Tuesday, though the House began debating the measure Thursday.

The postponement comes shortly after the legislation's Senate author, Sen. Dick Durbin (D., Ill.), said he would be open to limiting the measure to just subprime mortgages.

Some centrist Democrats began to waver after the remarks, balking at supporting a controversial bill amid signs that the Senate might pass a narrower version. The Obama administration, which backs the measure, also proposed tighter restrictions than are contained in the House legislation.

At a meeting of House Democrats Thursday, centrist Democrats raised concerns that the measure offered little help for troubled homeowners who don't want to turn to the bankruptcy courts for relief, Rep. Ellen Tauscher (D., Calif.), said.

The bulk of her constituents who are struggling with mortgage payments "want a quality government loan modification," Ms. Tauscher, a leader of the business-friendly New Democrat Coalition, said.

She added that she and other New Democrats would support the legislation, but wanted assurances from Donovan than the Obama administration was moving swiftly on its plan to offer incentives for mortgage servicers to modify loans. They also want to hear more details about the plan, Ms. Tausher said.

"As of now, we have a skeleton of a program and there still are some Gordian knots that need to be worked out," she said.

The administration is set to release the details of its plan next Wednesday.

Under the legislation, strapped borrowers could have the principal balance of their mortgage loan reduced by a bankruptcy judge -- known as cram down. Currently only vacation properties, and not primary residences, can be crammed down by a judge.

The banking industry has been lobbying fiercely against the measure, contending it would raise borrowing costs on all homeowners. The measure has nonetheless gained momentum in recent weeks due to the shift in power in Washington and the perception that mortgage servicers haven't done enough to help strapped borrowers.

The Obama administration has made it a central plank of its plan to prop up the housing market. However, officials say they view it as a last resort, to be used only when serious attempts at voluntary modifications fail.

Proponents have already made one major concession to the banking industry, limiting the cram down authority only to existing mortgages in exchange for Citigroup's backing. Industry lobbyists are pushing to add further restrictions.

Some House Democrats appear unlikely to support the measure unless it is narrowed. "The criteria judges use [to rework mortgages] needs to be tightened," Rep. Allen Boyd (D., Fla.), a leader of the Blue Dog group of conservative Democrats.

In the Senate, it is unclear if proponents have the 60 votes necessary to avoid procedural obstacles to a vote. Only one Republican, Sen. Arlen Specter of Pennsylvania, has backed the measure.

Mr. Durbin on Tuesday told the American Banker trade publication that he was willing to restrict the authority to subprime mortgages.

Aside from the bankruptcy measure, the House legislation includes provisions to erect a safe harbor against investor lawsuits for servicers that modify loans. It would also revamp the Hope for Homeowners program, started last fall to help refinance troubled borrowers into more affordable government-backed loans.

— Michael R. Crittenden contributed to this report.

Report from Credit Suisse re Proposed Amendments to Chapter 13

This report has some useful information.  Thanks to Marc Stern in Seattle. 

Great Analysis of H.R. 200 in its Present Form

From my friend Peter Lively.  You can access his analysis here.  This looks like a handful but it really helps understand the proposal.  Printout the attachment and read it.  Its a little easier to understand.   

Variables:
C1 Certification that D received N.
C2 Certification that D attempted to contact lender for loan mod within 15 days.
C3 Certification that D attempted to contact lender for loan mod (no time required).
E Effective date of new law.
F Current FMV of R.
I Prevailing interest rate on petition date.
L Loan originating before E, secured by R, subject to N.
M All debt secured by R up to FMV.
N Notice that D receives from lender that it may commence foreclosure against R.
P Premium added to I for “risk”
R Debtor’s principal residence.
T Total debt secured by R; T = M + U.
U All debt secured by R over FMV and also debt formerly secured by R (due to TS or surrender).
X Proceeds paid to lender if property sold within 4 years of loan modification.
Y Maximum years of modified loan < or = (40 years - # years paid on existing loan).

Proposed Changes to Code:
109 Debt NOT include T, if F < $1,010,000 (plus CPI adjustments)
109 If C1, then no required CBC
502 If T subject to TILA then not an allowed claim
1322 Where petition not yet filed:
If D provides C2 (or, if TS date within 60 days of petition date) and T is ARM loan,
then Court may prohibit, reduce or delay adjustment of interest rate; OR
modify T under 506(a)(1) into M and U, then modify M over Y at I + P

Where case pending:
If D provides C3 before filing Plan or Plan Modification Motion, then Court may prohibit, reduce or delay adjustment of interest rate; OR
modify T under 506(a)(1) into M and U, then modify M over Y at I + P
BUT, if Debtor sells R, then lender gets X = the lesser of the allowed unmodified claim, and [100% - (20% * # years since loan modification)] * [Sale Price - (M + COS + Improvements)]

Manager's Proposed Amendments to HR 200

You can access the proposal here.  The right to modify a home mortgage would be limited to existing mortgages.  If the debtor sells the residence during the plan period, the creditor would get some of the excess proceeds if any.  The amendment will still apply to existing bankruptcy cases. 

Opposition to New Mortgage Bill Lining Up

According to an Associated Press Article yesterday,

The chief lobbyist for the Mortgage Bankers Association, Steve O'Connor, said new homebuyers would end up paying higher interest and bigger down payments if lenders are saddled with the risk that a judge could change mortgage terms.

"We're going to defend the industry" against "bad public policy," O'Connor said.

The association's 23-member government affairs team is trying to persuade lawmakers to kill the bankruptcy legislation. The team includes six lobbyists and nine policy experts who double as lobbyists, said O'Connor, senior vice president of government affairs.

Great Status Report on Proposed Legislation re Chapter 13 Modifications

Thanks to David P. Goch:

At yesterday's [1/22/09] House Judiciary Committee hearing on 2 bankruptcy bills, H.R. 200, the "Helping Families Save Their Homes in Bankruptcy Act of 2009," and H.R. 225, the "Emergency Homeownership and Equity Protection Act," intended to help families save their homes, all but one witness supported the bills put forth; and, for the most part, the Members in attendance were divided along party lines.

Witnesses including Reps. Miller (D-N.C.) and Marshall (D-Ga.); David M. Certner, legal counsel and legislative policy director of AARP; Matthew J. Mason, assistant director of the UAW-GM Legal Services Plan; and Adam J. Levitin, associate professor of law, Georgetown University Law Center all supported the bills.  The lone dissenter was Christopher J. Mayer, the Paul Milstein Professor of Real Estate and Senior Vice Dean, Columbia Business School.

Summarizing the position of the supporters, Mr. Levitin said "voluntary, private-market efforts to address the foreclosure crisis have all failed...bankruptcy is the only method that can fully address
the...problems."  Levitin went further postulating that bankruptcy mortgage loan modifications will not cause either higher mortgage interest rates or less credit availability.

Emphasizing this point, Mr. Mason testified that giving bankruptcy judges the power in Chapter 13 to modify mortgage loans on personal residences is "necessary."

Mr. Mayer, although agreeing that the mortgage crisis needed to be immediately addressed, stated the bill would "exacerbate problems" and would likely "bankrupt taxpayers and our financial system." Mayer's
suggestion was a three-pronged approach:

* Creating an incentive fee program to lien holders to avoid foreclosures coupled with legislation stating existing agreements can be modified by lien holders if modification is deemed to be better economically than foreclosure;
* Implementation of financial incentives for second lien holders to cooperate with any primary mortgage modification; and
* The federal government taking action to immediately reduce mortgage rates (possibly through issuing U.S. Treasury securities to fund new mortgages).

Ranking member Smith (R-Texas), taking Mr. Mayer's side in the debate, calling the legislation both "overly broad" and "open ended," and voiced his concern that the proposals "undermine personal accountability."

In related news, House Speaker Pelosi has indicated support for the proposals stating it is a "very high priority."  It is possible that the proposal might be added to the economic stimulus package (although
President Obama, while supporting the proposal, has said his preference is to not include it in the stimulus).  House majority leader Hoyer (D-MD) has stated the proposal enjoys wide support in both the House and Senate.

Text of New "Helping Families Save Their Homes" Senate Bill

The text of S. 61 can be accessed here. 

S. 61 - Senator Durbin's New Bankruptcy Bill

A summary of the bill is provided below:

Section 1. Short Title. Section 1 sets forth the short title of the bill as the "Helping Families Save Their Homes in Bankruptcy Act of 2009."

Section 2. Eligibility for Relief. Bankruptcy Code section 109(e) sets forth secured and unsecured debt limits to establish a debtor's eligibility for relief under chapter 13, currently equal to just over $1 million of secured debts and abotu $330,000 of unsecured. Section 2 amends this provision to provide that the computation of of these debt limits does not include the secured or unsecured portions of debts secured by the debtor's principal residence, if:

First, the current value of the debtor's principal residence is less than the secured debt limit.

Second, if the debtor's principal residence was sold in foreclosure or the debtor surrendered such residence and the current value of such residence is less than the secured debt limit.

In addition, section 2 amends section 109(h) to waive the mandatory requirement that a debtor receive credit counseling prior to filing a chapter 13 case where the debtor has received notice that the holder of a claim secured by the debtor's principal residence may commence a foreclosure proceeding against such residence.

Section 3. Prohibiting Claims Arising from Violations of Consumer Protection Laws. Section 3 amends Bankruptcy Code section 502(b) to disallow a claim that is subject to any remedy for damages or rescission as a result of the claimant's failure to comply with any applicable requirement under the Truth in Lending Act or other applicable state or federal consumer protection law in effect when the noncompliance took place, notwithstanding the prior entry of a foreclosure judgment.

Section 4. Authority to Modify Certain Mortgages. Section 4 amends Bankruptcy Code section 1322(b) to permit modification of mortgages that are secured by the debtor's principal residence in specified respects.  The modification authority applies in a chapter 13 case where the debtor's principal residence is the subject of a notice that a foreclosure may be commenced.  New section 1322(b)(11) allows the court to modify the rights of a mortgagee by: (1) providing for payment of the amount of the allowed secured claim as determined under section 506(a)(1); (2) prohibiting, reducing, or delaying any adjustable interest rates applicable on and after the date the case is filed; (3) extending the repayment period of the mortgage for a period that is no longer than the longer of 40 years (reduced by the period for which the mortgage has been outstanding) or the remaining term of the mortgage beginning on the filing date of the case; and (4) providing for the payment of interest at an annual percentage rate calculated at a fixed annual percentage rate equal to that used for conventional mortgages as published by the Board of Governors of the Federal Reserve System, plus a reasonable premium for risk.

Section 5. Combating Excessive Fees. Section 5 amends Bankruptcy Code section 1322(c) to provide that the debtor, the debtor's property, and property of the bankruptcy estate are not liable for a fee, cost, or charge incurred while the chapter 13 case is pending and that arises from a debt secured by the debtor's principal residence, unless the holder of the claim complies with certain requirements. These
requirements consist of the following: (1) the holder files with the court an annual notice of such fee, cost, or charge (or on a more frequent basis as the court determines) before the earlier of one year of when such fee, cost, or charge was incurred or 60 days before the case is closed; (2) the fee, cost, or charge is lawful under applicable nonbankruptcy law, reasonable, and provided for in the applicable
security agreement; and (3) the value of the debtor's principal residence is greater the amount of the claim, including such fee, cost or charge. If the holder fails to give the required notice, such failure is deemed to be a waiver of any claim for fees, costs, or charges (as described in this provision) for all purposes. Any attempt to collect such fees, costs, or charges would constitute a violation of the
Bankruptcy Code's discharge injunction under section 524(a)(2) or the automatic stay under section 362(a). Section 5 further provides that a chapter 13 plan may waive any prepayment penalty on a claim secured by the debtor's principal residence.

Section 6. Confirmation of Plan. Section 6 amends Bankruptcy Code section 1325(a) to provide protections for a creditor whose rights are modified under new section 1322(b)(11).  As a condition of confirmation, it requires a plan to provide that such creditor must retain its lien until the later of when the claim (as modified) is paid or the debtor obtains a discharge. In addition, the court must find that the modification is in good faith.

Section 7. Discharge. Bankruptcy Code section 1328 sets forth the requirements for discharge. Section 7 amends section 1328(a) to clarify that a claim modified under section 1322(b)(11) is not discharged to the extent of the unpaid allowed secured portion of the claim.

Section 8. Effective Date; Application of Amendments. Section 8(a) provides that the Act and the amendments made by it, except as provided in subsection (b), take effect on the Act's date of enactment. Section 8(b) provides that the amendments made by the Act apply to cases commenced under title 11 of the United States Code before, on, or after the Act's date of enactment.

Deal Between Citigroup and Senate

The Wall Street Journal is reporting that a "deal" has been reached between Citgroup and top Democrats in the Senate.  This major player in the industry has agreed to withdraw its opposition to cramdowns on home mortgages.  The article can be accessed here.  I expect this legislation to pass later this month and then "whoa nelly." 

New House Bill on Modifying Home Mortgages

110th CONGRESS  2d Session  H. R. 7328
December 10, 2008
Mr. CONYERS (for himself, Mr. DELAHUNT, and Mr. NADLER) introduced the following bill; which was referred to the Committee on the Judiciary

SEC. 2. WAIVER OF COUNSELING REQUIREMENT WHEN HOUSES ARE IN FORECLOSURE.
Section 109(h) of title 11, United States Code, is amended by adding at the end the following:
`(5) The requirements of paragraph (1) shall not apply in a case under chapter 13 with respect to a debtor who submits to the court a certification that the debtor has received notice that the holder of a claim secured by the debtor's principal residence may commence a foreclosure on the debtor's principal residence.'.
SEC. 3. AUTHORITY TO MODIFY CERTAIN MORTGAGES.
Section 1322(b) of title 11, United States Code, is amended--
(1) by redesignating paragraph (11) as paragraph (12),
(2) in paragraph (10) by striking `and' at the end, and
(3) by inserting after paragraph (10) the following:
`(11) notwithstanding paragraph (2) and otherwise applicable nonbankruptcy law, with respect to a claim for a debt for a loan secured by a security interest in the debtor's principal residence that is the subject of a notice that a foreclosure may be commenced, modify the rights of the holder of such claim--
`(A) by reducing such claim to equal the value of the interest of the debtor in such residence securing such claim;
`(B) by waiving any otherwise applicable early repayment or prepayment penalties;
`(C) if any applicable rate of interest is adjustable under the terms of such security interest by prohibiting, reducing, or delaying adjustments to such rate of interest applicable on and after the date of filing of the plan; and
`(D) by modifying the terms and conditions of such loan--
`(i) to extend the repayment period for a period that is the longer of 40 years (reduced by the period for which such loan has been outstanding) or the remaining term of such loan, beginning on the date of the order for relief under this chapter; and
`(ii) to provide for the payment of interest accruing after the date of the order for relief under this chapter at an annual percentage rate calculated at a fixed annual percentage rate, in an amount equal to the then most recently published annual yield on conventional mortgages published by the Board of Governors of the Federal Reserve System, as of the applicable time set forth in the rules of the Board, plus a reasonable premium for risk; and'.
SEC. 4. COMBATING EXCESSIVE FEES.
Section 1322(c) of title 11, the United States Code, is amended--
(1) in paragraph (1) by striking `and' at the end,
(2) in paragraph (2) by striking the period at the end and inserting a semicolon, and
(3) by adding at the end the following:
`(3) the debtor, the debtor's property, and property of the estate are not liable for a fee, cost, or charge that is incurred while the case is pending and arises from a debt that is secured by the debtor's principal residence except to the extent that--
`(A) the holder of the claim for such debt files with the court notice of such fee, cost, or charge before the earlier of--
`(i) 1 year after such fee, cost, or charge is incurred; or
`(ii) 60 days before the closing of the case; and
`(B) such fee, cost, or charge--
`(i) is lawful under applicable nonbankruptcy law, reasonable, and provided for in the applicable
security agreement; and
`(ii) is secured by property the value of which is greater than the amount of such claim, including such fee, cost, or charge;
`(4) the failure of a party to give notice described in paragraph (3) shall be deemed a waiver of any claim for fees, costs, or charges described in paragraph (3) for all purposes, and any attempt to collect such fees, costs, or charges shall constitute a violation of section 524(a)(2) or, if the violation occurs before the date of discharge, of section 362(a); and
`(5) a plan may provide for the waiver of any prepayment penalty on a claim secured by the debtor's principal residence.'.
SEC. 5. CONFIRMATION OF PLAN.
Section 1325(a) of title 11, the United States Code, is amended--
(1) in paragraph (8) by striking `and' at the end,
(2) in paragraph (9) by striking the period at the end and inserting a semicolon, and
(3) by inserting after paragraph (9) the following:
`(10) notwithstanding subclause (I) of paragraph (5)(B)(i), the plan provides that the holder of a claim whose rights are modified pursuant to section 1322(b)(11) retain the lien until the later of--
`(A) the payment of such claim as reduced and modified; or
`(B) discharge under section 1328; and
`(11) the plan modifies a claim in accordance with section 1322(b)(11), and the court finds that such
modification is in good faith.'.
SEC. 6. DISCHARGE.
Section 1328 of title 11, the United States Code, is amended--
(1) in subsection (a)--
(A) by inserting `(other than payments to holders of claims whose rights are modified under section
1322(b)(11)' after `paid' the 1st place it appears, and
(B) in paragraph (1) by inserting `or, to the extent of the unpaid portion of the claim as reduced, provided for in section 1322(b)(11)' after `1322(b)(5)', and
(2) in subsection (c)(1) by inserting `or, to the extent of the unpaid portion of the claim as reduced,
provided for in section 1322(b)(11)' after `1322(b)(5)'.
SEC. 7. EFFECTIVE DATE; APPLICATION OF AMENDMENTS.
(a) Effective Date- Except as provided in subsection (b), this Act and the amendments made by this Act shall take effect on the date of the enactment of this Act.
(b) Application of Amendments- The amendments made by this Act shall apply only with respect to cases commenced under title 11 of the United States Code on or after the date of the enactment of this Act.

Senator Richard J. Durbin Press Conference

Senator Durbin will be holding a press conference on Tuesday, Dec. 9th, at 12:30 p.m., where he will announce that the very first bill he will introduce in the first minute of the first day of the 111th Congress will be his Helping Families Save Their Homes in Bankruptcy legislation. He will further announce his intention to see to it that this legislation is included in the economic stimulus package that will be considered in the first weeks of the new Congress.  Assuming this new legislation is the same as the bill he offered in October, 2008, it is Senate Bill S.2136. 

1. Attend the press conference.
If you are in DC, or a member of an organization that is headquartered in DC, PLEASE ATTEND OR URGE YOUR ORGANIZATION to attend.

2. Write an op-ed for your local paper in support of this important legislation. You know what to say: Tell a story of someone you know who is about to lose a home through no fault of their own.  Remind readers that this legislation requires no federal funding.  Bankruptcy courts deal with valuations every day.  If you own TWO homes, you can revalue the mortgage on the second already!  If you own 10 homes in a corporation, you can revalue the mortgages on all of them.  Why not extend the same right to poor single-home owners who can afford to pay a fixed-rate, market rate mortgage for the current value of the home?

3. Contact your Senators and Representative and ask for their support for this legislation. They are hearing every day from the mortgage industry that this "can't" work.  We know different. 

4. Get the word out:  If each of you e-mails 10 people who are concerned about the impact that foreclosures are having on your community, that will be an additional 2000 e-mails. Trust me, 2000 e-mails or calls from constituents is a huge number, and if you ask the people on your list to send it along, we can get a viral movement started.

Write to people who are being directly affected by the economic downturn: your friends who are realtors, contractors, subs, mortgage brokers, property managers, commercial landlords. They have the greatest stake. E-mail your friends who have lost their jobs, or whose companies are at risk. E-mail people who work with homeless services and charities. Let them know that this is a simple and cost-neutral way to help all homeowners. It does not create a complicated new federal bureaucracy. And remind them that it's past time to focus on keeping people in their houses, in order to stabilize the real estate market.

Thanks to Marc S. Stern, Seattle, WA

Federal Bailout Bill

Here is the text for the draft bailout proposal by Congress (with some ads - sorry about that).  The Treasury Secretary can buy up to $700 Billion in "mortgage related assets" for the next two years.  He has to report to Congress within three months "with respect to the authorities exercised under this act." 

Oh, and by the way, the statutory limit on borrowing is increased to $11.3 trillion. 

Housing and Economic Recovery Act of 2008

From the State Bar of California, Insolvency Law Committee

August 15, 2008

Dear Insolvency Law Committee Constituency List Members:

President Bush signed legislation on July 30, 2008, entitled the Housing and Economic Recovery Act of 2008 ("HERA"), regarding a wide range of housing and mortgage issues.  Those matters most pertinent to the Insolvency Law Committee are summarized below. 

FHA Program to Refinance Distressed Mortgages and Other Foreclosure Protection

HERA establishes a program for the Federal Housing Administration ("FHA") to insure up to $300 billion in refinanced mortgages, designed to allow borrowers in danger of losing their home to obtain less-expensive, fixed-rate loans through the FHA beginning in October 2008.  Only primary residences are eligible.  In exchange for an FHA guarantee, borrowers must share any appreciation with the government from the subsequent resale of a refinanced home.  In order to participate, lenders must agree to accept significant loss by reducing the principal amount of the loan by up to 15 percent.  Many lenders are likely to accept such terms, if their only alternative is foreclosure, in which they stand to lose the difference between the principal amount of the loan and the property's value.  In addition, HERA extends the period that a lender must wait before starting foreclosure of property owned by a person in military service from three months to one year after the soldier returns from service. 

New Caps on Government Sponsored Mortgages and Related Regulation

As of January 1, 2009, HERA will raise the limit on loans that Fannie Mae or Freddie Mac can buy or insure in high-cost areas to $625,000 from $417,000.  This presumably will lower interest rates for new homes and refinancings in those areas, as interest rates on so-called jumbo or non-conforming loans are typically higher than the rates on conforming loans which are eligible for Fannie Mae or Freddie Mac purchase or insurance.  Earlier this year, Congress had temporarily raised the caps for such loans, for 2008 only, to $729,750 in high-cost regions.  HERA also creates a regulatory agency to oversee Fannie Mae and Freddie Mac, which own or guarantee almost half of the mortgages outstanding in the United States.  In addition, the legislation will provide the Treasury Department an unlimited line of credit to Fannie Mae and Freddie Mac, and, if necessary, allow it to buy stock in those entities.  This enhanced support for the government sponsored is expected to bolster investor confidence, thereby increasing liquidity for borrowers.  However, this backing by the federal government puts taxpayers at risk. 

Housing Tax Breaks

HERA includes $15 billion in tax benefits, including (i) beginning in 2008, a deduction of $500 to $1,000 (for joint filers) for real property taxes incurred by taxpayers that do not itemize, and (ii) a tax credit of up to $7,500 for first-time homebuyers with modified adjusted gross income of $75,000 ($150,000 for joint filers) or less, who purchase a principal residence between April 9, 2008 and July 1, 2009.  The tax breaks are refundable, and must be repaid over 15 years, essentially making them interest-free loans.  They are expected to provide some stimulus to the home buying market. 

In addition, the legislation provides an additional $10 billion in mortgage revenue bonds for states' residential rental projects.  HERA also earmarks $4 billion in grants for local governments to buy and rehabilitate foreclosed or abandoned properties in communities that have been particularly impacted by increased foreclosures.  This is intended to provide funds for such areas to revitalize blighted neighborhoods and create affordable housing. 

These materials were written by Gary Kaplan of Howard Rice Nemerovski Canady Falk & Rabkin, P.C. in San Francisco.  gmkaplan@howardrice.com

Nice Summary of Pending Legislation on Chapter 13 Mortgage Issues

A big Thank You to Scott Clarkson, bankruptcy attorney in Torrance, who sent me the following email:

Please find attached a recent report (updated February 29, 2008) by the Congressional Research Service on the various proposals to amend Section 1322(b)(2) (which now prohibits cramdown on debt secured by a debtor’s primary residence).   Besides a good overview of section 1322(b)(2), the report compares the pending bills. 

Best regards,
Scott Clarkson

Bush Announces He Will Veto Mortgage Bill

According to the Washington Post today, Bush has announced he will veto the bills pending in Congress designed to allow homeowners to rewrite their home mortgages in chapter 13 cases.  His announced primary concern is federal spending; he will not "risk tax dollars."  He opposes legislation which "permits a select group of troubled borrowers" to rewrite their loans which will contribute to the troubles of the mortgage industry.  He opposes bailing out the mortgage industry as well by, for example, having the federal government buy distressed mortgages.  The article can be found here.