Failed a procedural vote in the Senate which required a 60-vote supermajority: 02.28.08
The Legislation:
The Foreclosure Prevention Act of 2008 authorizes federal bankruptcy courts to modify mortgage payments due on homeowners’ primary residences, a practice which is barred by current law. Title IV of the bill, also known as the Helping Families Save Their Home in Bankruptcy Act, would permit bankruptcy courts to restructure the debt on home mortgages by setting interest rates and principal at commercially reasonable market rates and extending repayment periods. Bankruptcy law currently permits such restructuring only for vacation homes, family farms, and yachts. The legislation establishes income restrictions for loan modification to limit such restructuring to homeowners for whom foreclosure is imminent. Only homeowners with insufficient income, after deduction of certain monthly expenses, to make mortgage payments that would allow them to retain possession of their primary residence would be eligible. The bill waives the current requirement for budget and credit counseling when homes are in foreclosure. A compromise version of the bill would apply only to existing subprime and untraditional loans and would allow lenders and investors to recapture the value of reduced principal that appreciates after loan modification.
The Foreclosure Prevention Act provides $4 billion to state and local governments for the rehabilitation and resale of abandoned and foreclosed homes via the Community Development Block Grant Program. The bill also directs $200 million to NeighborWorks, a nonprofit organization whose mission is to create affordable housing, for counseling activities to prevent home foreclosures. Additionally, the legislation authorizes state housing finance agencies to use proceeds from mortgage revenue bonds to refinance subprime loans. The bill increases the ceiling for each state’s issuance of such bonds by $10 billion. The act strengthens the disclosure requirements for mortgages by compelling lenders to inform borrows of the maximum monthly payment they would be required to make on their loans and restricts lender fees. Finally, in an unrelated provision, the Foreclosure Prevention Act provides tax breaks to corporations. For procedural reasons, the Senate vote on an unrelated House bill was a proxy for a vote on the Foreclosure Prevention Act.
The Middle-Class Position:
The Middle Class Supports. The federal government and the mortgage industry’s failure to address the subprime mortgage and foreclosure crisis adequately could result in as many as 1.9 million Americans losing their homes in 2008 and 2009. Despite national awareness of the dire situation throughout 2007, foreclosure filings increased 57% from January 2007 to January 2008. Extending the same bankruptcy protections to primary residences that currently apply to luxury yachts and vacation homes is not only fair, but would prevent approximately 600,000 families from losing their homes to foreclosure. Strengthened bankruptcy protection is also beneficial to families who are not themselves facing foreclosure: protecting these 600,000 families from foreclosure would save neighbors of foreclosed properties $72.5 billion in wealth that would otherwise be lost to reduced property values. Because the Foreclosure Prevention Act restricts eligibility for bankruptcy mortgage restructuring to homeowners who are unable to afford their current mortgages, mortgage interest rates should not increase: only homes in danger of foreclosure will qualify and the risk of foreclosure is already calculated into current interest rates. Funds for counseling services would further reduce the potential for foreclosure, while resources for redevelopment of abandoned and foreclosed homes would mitigate the decline of property value that weakens the financial stability of homeowners and shrinks the revenues of state and local governments. The Foreclosure Prevention Act is an important next step to assist cash-strapped middle-class Americans after the economic stimulus package signed into law in February of 2008.
From the Experts:
“This legislation will not significantly raise the cost of mortgage credit, disrupt secondary markets, or lead to substantial abuses by borrowers. Given that the total cost of foreclosure to lenders is much greater than that associated with a Chapter 13 bankruptcy, there is no reason to believe that the cost of mortgage credit across all mortgage loan products should rise…The housing market downturn is intensifying and mortgage foreclosures are surging. A self-reinforcing negative dynamic of mortgage foreclosures begetting house price declines begetting more foreclosures is underway in many neighborhoods across the country. The odds of a full-blown recession are very high. There is no more efficacious way to short-circuit this developing cycle and forestall a recession than passing this legislation.” –Mark Zandi, Chief Economist, Moody’s Economy.com, (December 5, 2007)
“Right now this is the only bill pending in Congress that would have any meaningful impact on the slide in the real estate market. The bill would provide two huge benefits: It would put an estimated 500,000 families into long term, permanent mortgages that they could afford, and it would cost investors far less than a foreclosure. Best of all, it would force the write downs to be absorbed by the investors, not the taxpayers. The mortgage industry is opposed. Perhaps the industry believes it can squeeze out more by talking people into handing over the keys to their homes or in pushing through to foreclosure. Or perhaps the industry believes that if things get bad enough, the government will bail them out. Either way, the investors don't want to have to write down the loans in bankruptcy…we need a way to untangle the mortgage mess, and the bankruptcy bill is the only game in town.” –Elizabeth Warren, Professor of Law, Harvard University (February 25, 2008)
Beyond this Bill:
The Foreclosure Prevention Act is a necessary step in restoring fairness to both the housing market and to bankruptcy proceedings. The middle-class Americans who are most exposed to the threat of foreclosure will be protected from losing their homes, while the self-reinforcing spiral of foreclosures and falling home prices will be curtailed. Eligibility requirements for mortgage restructuring must be inclusive enough to ensure that all homeowners in danger of losing their houses are protected, but be sufficiently stringent to prevent increases in interest rates. Finely calibrated eligibility requirements would allow for the permanent extension of bankruptcy restructuring to primary residences, instead of restricting restructuring to current subprime and untraditional loans. The act restores some fairness to bankruptcy law, which was changed in 2005 to treat middle class debtors more harshly. Further legislation is necessary to reform the worst provisions of that bill that make it harder for debtors to get a fresh start. The tax write-offs for businesses are not germane to the bill and are unnecessary.
Percentage of securitized subprime loans from the fourth quarter of 2006 that are projected to end in foreclosure: 50
Percentage increase of foreclosure filings from January 2007 to January 2008: 57
Estimated number of foreclosures that the mortgage restructuring provision in the Foreclosure Prevention Act would prevent: 600,000
Number of homes that will experience devaluation because of subprime foreclosures that take place nearby: 40.6 million
Average decline in property values for homeowners living near foreclosed properties, in dollars: 5,000
Amount of wealth saved by the Foreclosure Prevention Act that would otherwise be lost because of foreclosures of neighboring properties, in dollars: 72.5 billion
Search our analyses of legislation
significant to America’s current and
aspiring middle class, and find out
how members of Congress voted on
those bills.
