Newspaper reports (e.g., here from the Wall Street Journal) say that a deal has been reached in the U.S. House of Representatives to advance legislation that would give bankruptcy judges more power to adjust the payment terms of a home mortgage. For those who want the basic background, I wrote a post trying to explain what this legislation would do. The short version is that home mortgage lenders get special protections in bankruptcy court that most every other lender does not get, including lenders on rental and vacation property. These bills would eliminate this special protection and put home mortgage lenders on the same footing as other lenders.
Democrats apparently have received the backing of Rep. Steve Chabot (R-Ohio) who had his own version of the legislation. To get this deal, Democrats apparently had to agree to limit its applications to loans made after January 1, 2000 that already are in default or in foreclosure at the time of bankruptcy filing. Also, the bankruptcy judge would have discretion to reject a debtor’s request to modify the mortgage if the judge determined the debtor had sufficient income to pay the mortgage under its original terms.
The politics of this deal are murky. I completely agree with my the comments of my co-blogger, Elizabeth Warren (here and here), that the mortgage deal reached last week wasn’t much of a deal at all and was primarily an industry job designed to give the appearance of action to head off legislative efforts at real mortgage assistance. I’m glad to see that little bit of political theater has been unheeded at least in some quarters. The big lenders, including those represented by the Financial Services Roundtable, continue to oppose these changes to the Bankruptcy Code. This latest development may get the bankruptcy changes out of a House committee but it is unlikely any legislation would emerge from the House before the end-of-the-year recess. Even if it gets past the House, it will have a lot of hurdles to become law. The banking industry appears to be relying on the Senate and the White House to block the bankruptcy legislation. It would be helpful if this legislation were to become law, but those facing home foreclosures should not expect the bankruptcy laws to change anytime soon.
Comments
One response to “Mortgage Deal Reached in House of Representatives”
I have to disagree with Bob’s argument that allowing strip down of home mortgages under the proposed legislation would just treat them the same (put them “on the same footing”) as other secured debts. No other secured debt that is stripped down can be paid off over more than the five year maximum life of the chapter 13 plan. As a result, with regard to other secured debts, strip down either is not feasible (because the payments would be so high) or else the secured creditor quickly receives substantial paydown of the stripped down amount of the debt. The proposed legislation would allow payment of stripped down home mortgages over a much longer period, put home lenders at risk of substantial increased losses if the property continues to lose value, and force them to receive for a very long period a rate of return on the value of their collateral that is likely to be substantially below a market rate.
Debtors cannot now, as a practical matter, strip down substantial first mortgages on vacation homes (because the monthly payments would be too high), nor would they be able to do so under the proposed legislation. Debtors currently cannot strip down purchase money auto loans until the loans have been in payment for about half or more of their term. The bills would treat home loans worse than car loans.
Perhaps Bob or someone could include, in a main post, the link to my Senate Judiciary Committee testimony that makes some of these points, especially in light of Nathalie’s criticism of my arguments. See http://judiciary.senate.gov/testimony.cfm?id=3046&wit_id=6808.
I have a great deal of respect for Bob, Natalie, and the others who post on this blog. But I certainly disagree with them on this issue, and I am surprised that the argument continues to be made that allowing strip down of home mortgages will just treat them the same as mortgages on vacation homes and most other secured consumer debt.
Mark S. Scarberry
Pepperdine Univ. School of Law