A procedural vote to kill the amendment passed: 04.03.08
The Middle Class Supports this Amendment, and Opposes the Procedural Vote to Kill It.
The Legislation:
The Helping Families Save Their Homes in Bankruptcy Amendment of 2008 authorizes federal bankruptcy courts to modify the terms of nontraditional and subprime mortgages made on homeowners’ primary residences, a practice which is barred by current law. The amendment defines a nontraditional mortgage as one which includes payments that do not cover the full amount of interest due on the mortgage or payments that cover only the interest rate but do not reduce the principal; a subprime loan is a first mortgage that has an annual interest rate that is more than 3% higher than that set by the United States Treasury and any subsequent mortgage with an interest rate more than 6% higher. The bill 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 declaring bankruptcy who cannot afford to make mortgage payments and are in imminent danger of foreclosure are eligible for loan modification under this law.. If a bankruptcy court reduced the mortgage’s principal to the current fair market value of the property and the value later rose, a lender would be entitled to receive the net proceeds from a sale of the property. The bill waives the current requirement for budget and credit counseling when homes are in foreclosure.
Additionally, the amendment protects homeowners from liability for fees incurred while a bankruptcy is being processed and permits bankruptcy courts to wave penalties on homeowners who pay their mortgages in full ahead of schedule. The legislation protects at least $75,000 in equity in a principal residence from creditors in bankruptcy for homeowners over the age of 55.
The Middle-Class Position:
The Middle Class Supports the Durbin Amendment and Opposes this vote to kill the amendment. 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 60% from February 2007 to February 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 600,000 families from losing their homes to foreclosure. Strengthened bankruptcy protection is also beneficial to middle-class 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 Helping Families Save Their Homes in Bankruptcy Amendment restricts eligibility for bankruptcy mortgage restructuring to homeowners who are unable to afford currently existing 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. The “homestead floor” of $75,000 for homeowners over the age of 55 who are in bankruptcy allows older middle-class Americans to protect a minimum amount of investments they have made in their homes, while preventing wealthy Americans from using large estates to shelter money from creditors.
From the Experts:
“Senator Durbin’s legislation, which would give bankruptcy judges the authority in a Chapter 13 to modify mortgages by treating them as secured only up to the market value of the property, will significantly reduce the number of foreclosures. An estimated over one-fourth of homeowners likely to lose their homes between now and the end of the decade, equal to an estimated 570,000 homeowners, would benefit from this legislation...This would be very helpful in reducing the pressure on housing and mortgage markets and will measurably reduce the odds of recession next year… 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, Founder and Chief Economist, Moody’s Economy.com, (December 5, 2007)
“[Legislation like this amendment] 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, Leo Gottlieb Professor of Law, Harvard University (February 25, 2008)
Beyond this Bill:
In responding to the worsening housing crisis, the Senate rejected the most potent weapon they have to assist middle-class Americans at risk of losing their homes. Increased funds for counseling services, resources for redevelopment of abandoned and foreclosed homes, and funds for local agencies to restructure a limited number of mortgages – elements of a bipartisan response to the housing crisis – are an insufficient response to a crisis from which the federal government has been too willing to shield Wall Street, while putting the interests of middle-class homeowners second. Indeed, while the Federal Reserve put $30 billion of taxpayers’ money at risk to prevent the collapse of the investment bank Bear Sterns, the Senate rejected the Helping Families Save Their Home in Bankruptcy amendment that would have cost the Treasury Department nothing.
The Helping Families Save Their Homes in Bankruptcy Amendment was a necessary step in restoring fairness both to the housing market and to bankruptcy proceedings. The middle-class Americans who are most exposed to the threat of foreclosure would have been protected from losing their homes, while the self-reinforcing spiral of foreclosures and falling home prices would have been curtailed. Finely calibrated eligibility requirements in subsequent legislation might then have allowed for the permanent extension of bankruptcy restructuring to primary residences, instead of restricting restructuring to current subprime and untraditional loans. The act would have restored 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.
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 February 2007 to February 2008: 60
Estimated number of foreclosures that a mortgage restructuring provision for primary residences 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 the Center for Responsible Lending estimates would be saved by similar legislation that would otherwise be lost because of foreclosures of neighboring properties, in dollars: 72.5 billion
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