H.R. 3609, Mortgage Cramdown and What Comes Next

With the recent economic turmoil, there have been rumors that the current 110th Congress may address modification of 11 U.S.C. §1322(b)(2). If not addressed by the 110th Congress in its waning days, legislation most certainly will be introduced in the 111th Congress to make primary home mortgages subject to cramdown.

Currently, 11 U.S.C. §1322 (b)(2) prohibits chapter 13 debtors from modifying first mortgages on their primary residences. Debtors may, however, propose plans that modify mortgages on second homes, personal property, automobiles, vacation homes, rental property and investment or commercial property. 11 U.S.C. §1322(b)(2) has prevented adjustments to primary home mortgages since the Code was enacted in 1978. 

11 U.S.C. §1322(b)(2) provides as follows:

(b) Subject to subsections (a) and (c) of this section, the plan may -

(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence....

Several bills were introduced during the 110th Congress that would allow some modification of mortgages on the principal residence, but none have been passed by Congress as of the writing of this article.[1] Those bills are as follows:

1. H.R. 3609 (the Emergency Home Ownership and Mortgage Equity Protection Act), which was ordered to be reported favorably by the House Judiciary Committee;
2. S. 2133 and H.R. 3778 (the Home Owners Mortgage and Equity Savings Act, or HOMES Act);
3. S. 2136 (the Helping Families Save Their Homes in Bankruptcy Act of 2008); and
4. S. 2636 (the Foreclosure Prevention Act of 2008).

One of the more promising bills is H.R. 3609, the Emergency Home Ownership and Mortgage Equity Protection Act, introduced by Mr. Miller of North Carolina in Sept. 2007. It was amended with language agreed upon by Mr. Chabot and Mr. Conyers. H.R. 3609 allows for the cramdown of mortgages on the debtor's principal residence under certain limited conditions in a chapter 13 bankruptcy.

The beauty of allowing the restructure of certain home loans in chapter 13 is that the mechanism to effectuate the change is already in place. It is the chapter 13 trustee's office. Chapter 13 offices are equipped with staff and the expertise to evaluate and administer home mortgages for a period of three to five years. After this period of time, the debtor would take over the restructured mortgage payment directly. Most importantly, the cramdown provision would not impose any additional cost on taxpayers.

As amended by the "Conyers-Chabot" compromise, H.R. 3609 would allow debtors to propose plans that modify home mortgages if certain strict conditions apply:[2]

1. The mortgage must originate between January 1, 2000 and the effective date of the bill;
2. A foreclosure has been filed; and
3. The Chapter 13 must be filed within seven years of the bill's enactment.

H.R. 3609 applies only if the mortgage is a subprime or nontraditional mortgage. It allows for a delay of the counseling requirement when a home is in foreclosure.

H.R. 3609 would allow a cramdown of the mortgage lien to fair market value. It would also waive prepayment penalties and prohibit, reduce or delay adjustment of the variable interest rate to the prevailing rate at the time of the filing of the bankruptcy petition.

Additionally, H.R. 3609 provides a fixed interest rate based on the prevailing rate as published by the Board of Governors for the Federal Reserve System, plus a reasonable yield for risk, and allows for payment of the mortgage debt over 30 years less the number of years the loan has been outstanding (or the remaining term of such loan).

Specifically, H.R. 3609 allows for the modification of the rights of the mortgage claimholder:

1. by reducing such claim to equal value of the proper interest of the debtor securing such claim;
2. by waiving any otherwise applicable early repayment or prepayment penalties; and
3. if any applicable rate of interest is adjustable under the terms of such nontraditional mortgage or such subprime mortgage by prohibiting, reducing or delaying adjustment to such rate of interest applicable on or after the date of filing of the plan.

Section five (5) of H.R. 3609 combats excessive fees from lenders and provides that the debtor, the debtor's property and the property of the estate are not liable for a fee, cost or charge that arises from a security interest that is secured by the debtor's principal residence while the case is pending except under certain conditions. To recover charges accrued postpetition, the holder of such claim must file a notice with the court of such fee, cost or charge before the earlier of one year after the fee, cost or charge is incurred, or 60 days before the closing of the case. Such fee, cost or charge must be lawful under applicable nonbankruptcy law, reasonable and provided for in an agreement secured by such security agreement.

H.R. 3609 has some promising attributes, but we need more. The criterion that debtors must be in foreclosure should be eliminated. Debtors will just wait for the foreclosure to be filed, and the home will be that much harder to save because the mortgage debt will increase rapidly with accelerated charges. H.R. 3609 should be expanded to apply to other kinds of mortgages-not just the subprime or nontraditional mortgage.

Legislation should require that the mortgage companies may share in any profit if the home is sold or refinanced for a higher amount within a reasonable timeframe unless refinanced by the current holder of the mortgage. If appropriate legislation is enacted quickly, some homes can be saved through chapter 13. Others can be saved by some of the existing programs outside of bankruptcy, such as programs initiated by Indymac Federal Bank and Bank of America.[3] J.P. Morgan Chase & Co. recently launched a program to restructure $70 billion in home mortgages.[4] The country needs a multitude of programs and options to save homes and pull it out of the current housing crisis. 

Some homes cannot be saved, and in these instances foreclosure is inevitable because the homeowners did not earn enough to purchase the home in the first place. As the country climbs out of this crisis, legislators and regulators must be sure to tighten the standards for new loans. It will take several years for all the "bad" mortgages to cycle out of system. Lending regulations for new loans should require 5-20 percent down, even if a borrower is purchasing the home from a foreclosure sale. The down payment cannot be borrowed. Bundling of two or more mortgages to effect a single purchase, resulting in a zero down payment, must be banned.

The monthly payment must be one fourth to one third of take-home or net pay. Borrowers must show proof of income. Mortgage broker and title fees and costs must be capped and more strictly regulated.

In this economic crisis, even the wisdom of the former Federal Reserve Chairman, Alan Greenspan, in allowing an unregulated mortgage industry to buy and sell mortgage securities and derivatives has been questioned.[5] Clearly it is time for a new day and a new legislation that will help the mortgage industry climb out of this economic crater, but also enact controls so that we do not repeat our mistakes.

Author's Note: A special thank you to Frank DiCesare, my Staff Attorney, for his assistance with research. I would also like to thank the staffs of Congressman Brad Miller and Congressman Steven Chabot for information regarding pending legislation.