CONGRESSWOMAN ELISE STEFANIK
The revised managers' amendment to H.R. 1106, the Helping Families Save Their Homes Act, is expected to be considered on the floor of the House on Thursday, March 5, 2009. H.Res. 190, which was passed on February 26, by a vote of 224-198, provides for one hour of general debate (which has expired) and the consideration of four amendments, each debatable for ten minutes, except for the Manager's Amendment, which is debatable for 30 minutes. H.Res. 205 provides that the Manager's Amendment shall be modified as summarized below.
"Lack of Good Faith": H.R. 1106 requires a bankruptcy court to find that a crammed down loan modification occurring as a result of a chapter 13 bankruptcy proceeding is made in "good faith." The revised managers' amendment states that "lack of good faith" exists if a judge determines that the debtor has the means to pay all of their debts and future payments "without difficulty," or if the mortgage holder has offered the debtor a "qualified loan modification" that would allow the debtor to reduce their debt without a cram down.
Qualified Loan Modification: The amendment defines the term "qualified loan modification" for the purposes of determining whether a mortgage holder has acted in good faith. Under the revised mangers amendment, a qualified loan modification means a loan modification agreement made in accordance with the Obama Administration's Homeowner Affordability and Stability (HAS) plan that:
Though the revised amendment would allow a judge to determine that a lack of good faith exists if mortgage lender does not offer an Obama-plan loan modification, debtors who receive voluntary modifications would still be allowed to go into bankruptcy and obtain a mortgage principal cram down.
Recapture of Principal Following Sale: The amendment requires any borrower receive a cram down on the principal of their loan to pay the mortgage holder a percentage of the sale of the home if it is sold within five years of the cram down and the borrower has not paid the entirety of the loan. The debtor would be required to pay a percentage of the difference between the amount the home is sold for and the amount of the mortgage owed. The debtor would be required to pay 90% of the difference if the home was sold within one year of a cram down. That percentage would decline by 20% each of the following year for up to five years (a mortgage holder would be eligible to receive 10% of the difference in the fifth year). This provision increases the recapture amount from the original bill, which required the debtor to pay 80% if the home was sold in the first year which declined by 20% each year over four years.
Confirmation of Bankruptcy Plan: Allows a bankruptcy judge, at the request of the debtor or the mortgage holder, to confirm a bankruptcy plan that reduces the cost of a mortgage payment by reducing the interest rate on the mortgage rather than reducing the principal of the mortgage. The judge may only allow an interest reduction in lieu of a principal cram down if the plan reduces the debtor's monthly mortgage payment to 31% of their income-the threshold in the Obama plan. The judge-approved plan could reduce the interest rate for the entire 30-years of the newly modified mortgage. This provision would allow bankruptcy courts to re-write mortgages to change (and potentially eliminate) agreed upon interest rates for 30 years.
SUMMARY OF ORIGINAL AMENDMENTS
The following is a summary of the original Manager's Amendment to H.R. 1106-which was modified by the rule to include the revised provisions above-as well as the other three amendments made in order under the rule.
Please see the Legislative Digest for Wednesday, February 25, 2009, for a complete summary of the underlying legislation.
1. Amendment #27, Conyers (D-MI)-Contains the Manager's Amendment, which will be offered by Judiciary Chairman Conyers.
Negotiation Period: Prohibits a debtor from receiving a bankruptcy court ordered mortgage principal reduction ("cram down") unless the debtor contacts the mortgage holder at least 30 days prior to the beginning of the bankruptcy case regarding a voluntary loan modification. The debtor would be required to provide the mortgage holder with a written statement of the debtor's income, expenses, and debt.
FHA Appraisal: Requires a bankruptcy judge, when appraising a disputed fair market value of a home, to use the Federal Housing Administration's (FHA) appraisal rules to make the value determination.
"Good Faith" Definition: Under the legislation, cram down modifications are subject to a determination by a bankruptcy court that the debtor has acted in good faith. Amendment clarifies that lack of "good faith" exists if the debtor has no need for relief through a loan modification because the debtor has the ability to pay all of their debts "without difficulty" (undefined).
Data Reports: Requires the Comptroller of Currency and the Director of the Office of Thrift Supervision to submit a report to Congress within 120 days of enactment on the volume of mortgage modification that were reported during the previous quarter. The amendment would require that reports contain specific information regarding the results of the loan modifications, including the effect on monthly principal payments. The Comptroller of Currency and the Director of the Office of Thrift Supervision would be required to issue data collecting and reporting requirements within 60 days of enactment.
FHA Modifications: Requires the Secretary of HUD to produce rules and implement the program to pay out all or some of the balance owed on any Federal Housing Administration (FHA)-insured loans that are modified under the legislation (which is provided in the underlying bill) within 60 days.
Use of TARP Funds: Requires that any federal assistance provided from the Troubled Asset Relief Program (TARP) funds to mitigate foreclosures may not be used to modify a mortgage that is less than the GSE conforming loan limit at the time of the modification.
Senses of Congress: Expresses the sense of Congress that the Secretary of Treasury should use funds made available under the bill to purchase State and local mortgage revenue bonds.
The amendment also expresses the sense of Congress that mortgage holders should not initiate foreclosures until government foreclosure mitigation plans, like H4H or the President's "Homeowner Affordability and Stability Plan."
Fraud Task Force: Establishes a "Nationwide Fraud Task Force" to coordinate federal, state, and local initiatives to enforce mortgage fraud laws.
GAO Studies: Requires GAO to report regarding the increase of Chapter 13 bankruptcy filings within one year of enactment of the bill, the number of loans modified through bankruptcy, and a comparison of mortgages modified through bankruptcy as opposed to other government programs. In addition, GAO would be required to report on the impact of the bill on bankruptcy courts.
2. Amendment #9, Price (R-GA)-Allows a mortgage holder to recapture the amount lost as a result of a Chapter 13 bankruptcy cram down if the debtor sells the residence at a profit.
3. Amendment #5, Peters (D-MI)-Allows a debtor whose home is in foreclosure to meet pre-filing credit counseling requirements by receiving counseling either before foreclosure filing or 30 days thereafter. The underlying legislation eliminates pre-filing credit counseling requirements for debtors who are being foreclosed upon.
4. Amendment #35, Titus (D-NV)-Requires every mortgage servicers that receives payments of up to $1,000 for modifying loans insured under the H4H program to notify "at-risk homeowners" that may be eligible for H4H mortgage modifications.
On February 25, 2009, the Committee on Rules reported H.Res. 190, the rule for consideration of the Helping Families Save Their Homes Act. The rule made in order four amendments, including a managers' amendment, offered by the bill's sponsor, Rep. Conyers (D-MI), and three other amendments.
On Thursday, February 26, the House began consideration of the bill, pursuant to H.Res. 190. However, the bill was pulled from the House floor before amendments were debated and final consideration was postponed until this week. According to press accounts, the bill was pulled because of bi-partisan concerns regarding a provision in the bill would allow bankruptcy judges to reduce the principal amount contractually owed by the borrower. This provision, known as "cram down," has been criticized because it allows borrowers to abdicate their contractual obligation to repay the full amount of their loan. Many have argued that cram down would make it more costly for other individuals to purchase a home because lenders would have to increase interest rates and down payments to supplement the loss from the loan modification.
Furthermore, the cram down provision was criticized for providing benefits to delinquent mortgage borrowers at the expense of investors and responsible home buyers. Others have expressed concern that the increased costs imposed on mortgage providers by cram downs would add more uncertainty and upheaval into an already volatile housing market that is characterized by tight lending and uncertainty. Cram downs, it has been argued, could result in financial institutions hoarding their capital reserves further in anticipation of the impact that a large number of cram downs could have on mortgage backed securities, which would lose more value if numerous mortgages in the securities were subject to principal reductions.
As a result of these concerns, many leading organizations of independent lenders, banks, and businesses (including, the American Bankers Association, the American Financial Services Association, the American Insurance Association American, the Independent Community Bankers of America, the Mortgage Bankers Association Securities, the Financial Services Roundtable, and the U.S. Chamber of Commerce) expressed their opposition to cram down provisions in the legislation. In addition, every Republican Member of the Judiciary Committee signed a statement of minority views in opposition to cram down legislation which stated, in part, "Allowing for modification of principal residence mortgages in bankruptcy comes with too many attendant costs and the failure rate of Chapter 13 bankruptcies is much too high for it to be considered a practical approach to stopping foreclosures."
In response to these objections, the Majority pulled the bill and revised its provisions. A revised version of the bill will be considered on the floor, under a new rule with the revised managers' amendment.