Professor Mark Scarberry of Pepperdine University posted a comment taking issue with my statement that the proposed mortgage stripdown bills would do nothing more than put home mortgage lenders on an "equal footing" with other secured lenders in chapter 13. Given the criticisms of Scarberry’s congressional testimony in this space, at the least I should put his own words on an equal footing. Here is a link to Scarberry’s full testimony for our readers to examine it for themselves.
I appreciate Professor Scarberry’s engagement on this issue. Heck, I appreciate it when any one even bothers to read this blog, let alone post comments. It looks like that the two of us will just have to disagree. Scarberry states that "no other stripped down secured debt can be paid off over more than the five year maximum life of the chapter 13 plan." I just disagree. Section 1322(b)(5) of the Bankruptcy Code clearly allows a debtor to maintain payments over the life of the original mortgage, beyond the 5-year provision. That is true even if the plan proposes stripdown of the mortgage. (See here for an earlier explanation of the concept of "stripdown" in bankruptcy.) Thus, I continue to think it quite apt to point out that the pending bills would do nothing more than put home mortgage lenders on an equal footing with other secured lenders.
The key concept here is the idea of "maintaining payments." If a debtor exercises his or her rights to "maintain payments" beyond the maximum 5-year life of a chapter 13 plan, then the payments must be maintained under the original contract terms. Putting numbers on it probably helps illustrate the concept. Suppose a debtor owes $100,000 on a debt to be paid off over the next 30 years in payments of $800/month at 6.5% interest and the value of the collateral is $80,000. (I have no idea if those numbers work in terms of an amortization schedule–I just made them to illustrate the point.) If stripdown is allowed, then a chapter 13 plan could provide for the maintenance of the original payments under the original contract terms, i.e., $800/month at 6.5% interest.
In the current crisis, of course, many debtors are in trouble because their payments have or will ballooned as interest rates reset. In my example, to maintain payments under the original contract, the debtor might have to pay $1,200/month at 9.5% interest (again just to make up numbers). Thus, the right to maintain payments will not be of great help to many debtors with the situation we have today. The proposals in Congress need to (and some would) give bankruptcy courts the power to adjust interest rates and payment terms on home mortgages. But, the reason bankruptcy courts need this authority is because of the aggressive subprime lending practices that we have seen over the past several years. Without these lending practices, the right to maintain payments in chapter 13 plan might be enough to give effective relief to debtors.
Comments are open.
Comments
4 responses to “Equal Footings”
I appreciate Bob’s responding to my comment and giving the link to my testimony. Even the majority counsel for the Senate Judiciary Committee do not think that a stripped down secured claim can be paid over more than five years in chapter 13; see the section by section analysis of the Senator Durbin’s bill. The only circuit court opinion I know of on the issue is to that effect. See the Ninth Circuit’s Enewally decision cited below. Does Bob think Enewally is wrong? Does he think that a secured claim that has been stripped down by the plan is not “provided for” by the plan as that term is used in section 1325(a)(5)(B)?
Here is the relevant excerpt from my testimony with regard to whether it is permissible under current law to strip down a secured debt and pay it off over more than the five years of the plan (e.g., a car loan that is more than 2 1/2 years old and thus subject to strip down or a mortgage on a vacation home):
“If a secured creditor’s lien is stripped down under the current provisions of chapter 13, the stripped down amount must be paid off during the chapter 13 plan with interest—a period of no more than five years.[footnote 9] Thus, as a practical matter, a debtor cannot strip down a first mortgage on a vacation home, because the payments needed to pay off even the stripped-down amount over five years will be too large. The rare debtor who could afford such large payments does not deserve bankruptcy relief.
“[Footnote] 9. See 11 U.S.C. § 1325(a)(5)(B); Enewally v. Wash. Mut. Bank (In re Enewally), 368 F.3d 1165 (9th Cir. 2004); Scarberry & Reddie, supra note 2 [20 Pepperdine L. Rev. 425 (1993)], at 468-73; Helping Families Save Their Homes in Bankruptcy Act: Section by Section Summary, page 1 (Dec. 4, 2007 version); cf. Ann E. O’Donnell, Modification of Secured Claims: How to Reconcile Apparent Conflicts Within the Plain Language of § 1322, CHAPTER 13 ANALYSIS, ABI 12th Annual Northeast Bankruptcy Conference, available on Westlaw at 071405 ABI-CLE 13 (2005) (discussing Enewally and several district court and bankruptcy court decisions that split on the issue whether payments must be completed within the five years permitted for a plan). In my view, the Code is clear on this point; Enewally was correctly decided.”
It is even clearer that if the plan makes any changes in the secured creditor’s rights with respect to the stripped down secured claim (e.g., changing the interest rate), then the secured claim has been “provided for” by the plan and will be covered by the requirement of section 1325(a)(5)(B) that payments be made during the plan with a present value equal to the amount of the secured claim. Even if section 1322(b)(5) could be interpreted as Bob suggests, it would not eliminate the requirement that section 1325(a)(5)(B) be satisfied, which is a requirement for plan confirmation.
As a side matter, Credit Slips readers may want to see the updated chart I prepared for the ABI that compares the recent Conyers bill (the Conyers substitute amendment to H.R. 3609 that was approved 17-15 by the House Judiciary Committee) to the other bills introduced in Congress. The chart is here: http://www.abiworld.org/pdfs/UpdatedMortgageModificationLegislationChart.pdf.
With best wishes to Bob, Nathalie, the other bloggers at Credit Slips, and to Credit Slips readers for a joyous holiday season,
Mark Scarberry
Pepperdine
Mark,
I appreciate that lenders are out there to make money. And they entered contracts to do so. But, with subprime mortgages they either: a) were duped or b) took a huge risk and now have to pay the piper.
I really do not think that any lender who made a subprime mortgage could have been duped. Would you lend money to a person who had no way to show that they would repay the money? I would not (if I expected to get the money back). I certainly would not allow people to take out so called “liar” loans. And I would not rate a a package of securities that included those loans “AAA”. And I would not buy the loans, except at a great discount. Those in the financial industry who are crying now facilitated the process and should not look for sympathy, even in bankruptcy court.
What are their options? They can have foreclosures, which allows them to recoup some of their money, but they have to pay attorney’s fees (which will be discharged in bankruptcy). And, if they own other properties nearby, those properties will be devalued.
On the other hand, they can recoup some of their investments. What about a plan that reduces the mortgage to current market value at the time of the petition. The debtor has to pay interest on that value. When the plan ends (and, arguably, the debtor’s disposable income is higher and the debtor can afford a higher mortgage), the debtor has a choice: pay interest on a principal that is the higher of the current market value of the property or the market value at the time of the petition OR allow the property to go to foreclosure. The amount owed on the house for the purposes of foreclosure would be either the higher price, so that any increase in value of the property would benefit the lender.
This would have two advantages for the lender. First, there is a possibility that the debtor will eventually pay off the loan. Second, the lender has a chance of recouping more, five years down the road when the housing market has stabilized and, possibly, housing prices have risen.
Sure, this would require some revamping of the bankruptcy code, but we are doing that anyhow.
The current situation is lose/lose for lenders and borrowers, bankruptcy or foreclosure or both. Perhaps some people smarter than me can try to think of solutions that will enable lenders to make a little money and borrowers to become solvent.
In response to Allan:
The possibility that a stripped down home mortgage could be restored as a result of a later valuation was first raised (as far as I know) by Bob Zinman of St. John’s law school back in the 1980s when chapter 12 was being enacted. Apparently he raised the issue too late in the legislative process for it to be included.
I made the same point in response to questions at the Senate Judiciary Committee hearing on December 5: if a mortgage is stripped down due to a current low valuation, it would make sense at the end of the chapter 13 case to value the property again and to restore the mortgage to the extent that the property had regained value (perhaps, as Bob had suggested, on a shared appreciation basis to give the debtor an incentive to keep the home in good shape). Video of the judiciary committee hearing, including all the questions and answers, is archived on C-SPAN at http://www.c-span.org/rss/video.asp?MediaID=33704, though the brief written description of the hearing at that URL states erroneously that Senator Leahy chaired it, when in fact it was Senator Durbin.
Mark Scarberry
Pepperdine
The C-SPAN URL does not work because it has a comma added to it. And the ABI World URL for the mortgage legislation chart just takes you to the ABI home page, because it has a period added to it. Here are the correct URLs:
http://www.c-span.org/rss/video.asp?MediaID=33704
http://www.abiworld.org/pdfs/UpdatedMortgageModificationLegislationChart.pdf
Sorry about that.
Mark Scarberry
Pepperdine