posted by admin on Mar 25
The residential real estate market continues to deteriorate in 2008, with 20 key markets reporting steep drops.
By Ben Rooney, CNNMoney.com staff writer
Archive for March, 2008
The residential real estate market continues to deteriorate in 2008, with 20 key markets reporting steep drops.
posted by admin on Mar 25
www.consumerlaw.org
Several bills currently pending in Congress would repeal the Bankruptcy Code provision which prohibits modification of home secured loans. While the Bankruptcy Code generally permits secured claims to be modified, section 1322(b)(2) singles out mortgage claims and shields them from modification, other than through a plan which cures a mortgage default. This provision prevents consumers from changing the interest rate, amortization, or term of mortgage loans in a chapter 13 plan. The decision in Nobleman v. American Savings Bank, 508 U.S. 324 (1993) also makes clear that mortgage claims are not subject to stripdown to the value of the collateral.
The following bills[1] would permit stripdown and loan term modifications on home mortgages:
- The House bill is H.R. 3609 (‘‘Emergency Home Ownership and Mortgage Equity Protection Act of 2007’’). Following two subcommittee hearings, H.R. 3609 (as amended by substitute bill) was voted favorably out of the Judiciary Committee on December 12, 2007 on a 17-15 vote. A floor vote by the House is expected in early 2008.
- The Senate bill is S. 2136 (‘‘Helping Families Save Their Homes in Bankruptcy Act of 2007’’). S. 2136 has been referred to the Judiciary Committee, which held a hearing on the bill on December 5, 2007. It has now been included as Title IV in a separate larger stimulus bill, S. 2636 (“Foreclosure Prevention Act of 2008”). This bill as amended has been introduced as a substitute for H.R. 3221, also included as Title IV, and may proceed to a Senate Floor vote in April, 2008. (Any references to S. 2636 in this article will be to the amended substitute version).
Normally, a secured claim which is subject to stripdown under Code section 1325 must be paid in full within the three to five year duration of the plan. While this may work for claims secured by personal property, few debtors are able to pay a mortgage claim of $100-500,000, or more, during the plan. The bills provide a solution which is borrowed from chapter 12 farmer cases. Similar to Code § 1222(b)(5), the bills allow payment of the modified mortgage, regardless of the original amortization, over a period beyond the life of the chapter 13 plan. By eliminating the need to make additional payments on prepetition arrearages as under a cure plan, and by combining the term extension with interest rate and principal reduction, many debtors facing a home foreclosure would be able to propose feasible and affordable plans if this change is enacted. (The last question below provides a comparison between a cure plan under current law and a modification under the bills).
The period of time over which the mortgage debt can be reamortized varies slightly under the bills. S. 2136 provides in Sec. 101(a) that the mortgage term can be extended for a period up to 30 years after the case is filed, reduced by the period the loan has been outstanding. Thus, a chapter 13 case filed shortly after the first rate reset on a 2/28 mortgage (at the end of the loan’s second year) could provide for payment of the mortgage claim as modified over a 28-year term. The House bill, in Sec. 4 of H.R. 3609, and the Senate stimulus bill, in Sec. 412 of S.2636, use this same timeframe but would also allow repayment over the remaining term of the loan if that period is longer, such as might occur with a 40-year mortgage.
The bills contain almost identical language on determining the appropriate interest rate. Sec. 101(a) of S. 2136, Sec. 412 of S.2636, and Sec. 4 of H.R. 3609 state that the plan may provide for payment of interest on the mortgage claim at an annual percentage rate based on the Federal Reserve Board’s annual yield for conventional mortgages, plus a reasonable premium for risk. Although the interest rate starting point for mortgages would therefore be different than for other secured claims, using a conventional mortgage rate rather a prime rate,[2] courts can be expected to apply the Till factors in setting the risk premium.
Neither bill provides any specific additional guidance or limitations on how courts would determine the amount of permitted stripdown. Thus, a mortgage creditor’s allowed secured claim will be determined in the customary manner by applying Code § 506. Since the debtor in such cases will be proposing to retain the home, valuation generally will be based on the home’s fair market value (rather than its liquidation value) as of the effective date of the plan.
The original Senate bill, S. 2136, would apply to all claims secured by the debtor’s principal residence. The House and Senate stimulus bills would apply to “nontraditional” and “subprime” mortgages. Sec. 2 of H.R. 3609 and Sec. 411 of S.2636, add definitions for these terms to Code § 101:
· A “nontraditional” mortgage is defined to include interest-only and negative amortization loans, including payment-option ARMs. The definition excludes reverse mortgages and home equity lines of credit which are in a subordinate position. The Senate stimulus bill, in Sec. 412 of S.2636, excludes from coverage an interest-only mortgage if the creditor can prove that it determined in good faith when the loan was made, after a full underwriting process and based on verified information, that the debtor had a reasonable ability to repay at the full interest and principal payment amount (assuming a 30-year fully amortizing loan), and the debtor’s payments under the loan would meet the debt-to-income ratio permitted under HUD guidelines.[3]
· A “subprime” mortgage is defined as having an annual percentage rate which is greater than the sum of a Treasury security having a comparable maturity plus 3 percent on a first mortgage, and plus 5 percent on a subordinate mortgage.[4] The applicable Treasury rate would be for the time period as of the 15th day of the month preceding the loan application date. For example, on a 30-year mortgage made in 2006 with an application date of April 4, 2006, a “subprime” mortgage covered by H.R. 3609 would have an interest rate greater than 7.72% (Treasury rate of 4.72% plus 3%) on a first mortgage and 9.92% (Treasury rate of 4.72% plus 5%) on a subordinate mortgage.[5]
The House and the Senate stimulus bills provide that the subject mortgage loans must have been made during a specified period. Sec. 4 of H.R. 3609 provides that the loan must be incurred during the period from January 1, 2000 until the effective date of the bill. Sec. 412 of S.2636 states that the loan must be incurred before the effective date of the bill.
Finally, Sec. 4 of H.R. 3609 provides that the mortgage must be the “subject of a notice that a foreclosure may be commenced.”
Under the bills, the debtor may seek to modify a mortgage only if a plan to cure the default is not possible based on income and expense considerations used in the means test under BAPCPA. Sec. 101(a) of S. 2136, Sec. 412 of S.2636, and Sec. 4 of H.R. 3609 provide that modification would be permitted if, after deducting from the debtor’s current monthly income[6] the means test expenses allowed under section 1325(b)(3)[7] other than payments on the mortgage claim, the debtor does not have sufficient income to cure the mortgage default and maintain the ongoing payments during the plan. Many low- and moderate-income debtors who have defaulted on loans with abusive terms even before adjustable rates have reset should have little difficulty satisfying this test.
Sec. 6 of H.R. 3609 provides that if the plan proposes to modify a home secured loan, the modification must be proposed in good faith. This section of H.R. 3609 also provides that a mortgage creditor shall retain its lien until the later of: 1) payment of the claim as modified, or 2) discharge under Code section 1328.
An enormous problem for many debtors who attempt to save homes from foreclosure in chapter 13 is that mortgage creditors often misapply payments and add unauthorized or excessive fees to the mortgage accounts while the case is pending. These debtors emerge from bankruptcy after three to five years of struggling to cure an arrearage only to have the creditor begin foreclosure anew based on claims of unpaid fees for such items as attorney’s fees, property inspections, broker price opinions, and other charges allegedly incurred during the case. These fees and charges are added to mortgage accounts without notice to the borrower, trustee or bankruptcy court.
All three bills include a provision to remedy this problem. Sec. 201 of S. 2136, Sec. 421 of S.2636, and Sec. 5 of H.R. 3609 provide that fees and charges incurred during the pendency of a chapter 13 case may be charged to the debtor or added to the account only if:
· the mortgage creditor discloses the fee or charge in a notice filed with the court within 1 year after the fee or charge is incurred, or 60 days before the case closing; and
· the fee or charge is lawful under applicable nonbankruptcy law, reasonable, and provided for in the agreement.
The bills specify that the failure of the mortgage creditor to provide the required notice would amount to a waiver of the subject fee or charge and that any attempt to collect the fee or charge would be a violation of the automatic stay or the discharge injunction.
The bills also include provisions in these sections which state that a plan may provide for the waiver of any prepayment penalty on a mortgage claim.
None of the BAPCPA changes are repealed. The bills do, however, address the requirement of a prebankruptcy credit counseling briefing added by BAPCPA, which has caused problems for some borrowers facing foreclosure. Sec. 3 of H.R. 3609 states that the debtor may obtain the briefing within 30 days after the case is filed if the debtor certifies that he or she has received a notice from the mortgage creditor that a “foreclosure may be commenced.” This provision would effectively overrule court decisions which have held that a pending foreclosure is not a sufficient “exigent circumstance” which would merit a deferral of the counseling under the procedure Congress adopted in the 2005 law presumably to deal with emergencies such as foreclosures.
Sec. 102 of S. 2136 and Sec. 413 of S.2636 provide that the prepetition counseling requirement would not apply to a debtor who certifies that a foreclosure sale “has been scheduled.”
To the extent that the modification provided in the debtor’s plan includes a stripdown, the mortgage claim is bifurcated and the unsecured portion of the creditor’s claim would be discharged upon successful completion of the plan. The debtor’s plan would also provide for continuing payments on the reamortized mortgage after the case is closed. Sec. 7 of H.R. 3609 clarifies through an amendment to Code section 1328 that the remaining balance owed (as reduced by the stripdown) on the reamortized mortgage at the conclusion of the case is not discharged.
Importantly, the amount of the mortgage stripdown, like all other debt discharged in bankruptcy, is not treated as discharge of indebtedness income for tax purposes.[8] Given the limitations of the recently enacted Mortgage Forgiveness Debt Relief Act of 2007 (Pub. L. No. 110-142) in regard to home equity debt,[9] a mortgage modification in bankruptcy under these bills would avoid tax consequences for the debtor which might exist if the modification were made outside of bankruptcy.
The Senate bill contains several additional provisions which would:
· limit application of judicial estoppel doctrine by permitting trustees or debtors to pursue unscheduled legal claims in certain circumstances (Section 202 of S. 2136 and Sec. 422 of S.2636);
· confirm that bankruptcy judges can rule on core proceedings rather than refer the matter to arbitration (Section 203 of S. 2136 and Sec. 423 of S.2636);
· set a higher homestead floor for homeowners over the age of 55, which would help older homeowners who are fighting to keep their homes as they go through bankruptcy but live in states with low homestead exemptions (Section 204 of S. 2136 and Sec. 424 of S.2636);
· reinforce that consumer protection claims may be asserted in the claim allowance process in bankruptcy (Section 205 of S. 2136 and Sec. 425 of S.2636).
H.R. 3609 includes a sunset provision for two of the Code amendments; the changes permitting mortgage modifications and delay of counseling would apply only to chapter 13 cases filed within the 7-year period following enactment. All other provisions in H.R. 3609, including those dealing with creditor fee abuses, do not sunset and would be permanent changes to the Code. The Senate bills do not include a sunset provision.
Assume that the borrowers have a subprime 2/28 ARM mortgage with an initial teaser interest rate of 8.63%. Their monthly principal and interest payment is $1,748 ($1,973 with taxes & ins.) for the first 24 months. The borrowers are unable to afford even the teaser rate payment and fall behind. They file chapter 13 bankruptcy in the eighteenth month to stop a foreclosure sale. The principal owing at the time of filing is $225,000, with a total arrearage of $14,000, and their home is now valued at $200,000. To cure the arrears and maintain current payments with rate adjustments, they would need to make the following payments, assuming rate adjustments based on a LIBOR index plus a margin of 6, with applicable rate caps and using historical rates for the period 2004-2007. This also assumes that taxes and insurance remain constant during the plan.
$ 389 payment on arrears (assuming cure over 36 mos.)
$ 46 interest on arrears payment each month (assuming required by mortgage documents)
$ 44 trustee’s fee each month (assuming plan permits regular payments to be made directly to servicer and not considering administrative costs, such as attorney’s fees, or other payments under plan)
$ 2,227 monthly to keep current and cure arrears for first six months of plan (including taxes and insurance)
$ 2,364 monthly to keep current and cure arrears for months 7-12 of plan
$ 2,522 monthly to keep current and cure arrears for months 13 - 18 of plan
$ 2,651 monthly to keep current and cure arrears for months 19 - 24 of plan
$ 2,656 monthly to keep current and cure arrears for months 25 - 30 of plan
$ 2,664 monthly to keep current and cure arrears for months 31 - 36 of plan
If the Code changes made by the bills were enacted, the borrowers could propose to 1) extend the mortgage term, so that it would have another 342 months to run (360 original term less 18 months loan has been outstanding), 2) reduce the interest rate going forward at a fixed rate of 7.25%, and 3) reduce the current loan balance to $200,000 based on the fair market value of the property.
Proposed Chapter 13 Plan with Mortgage Modification:
$200,000 current loan balance
342 month term
7.25% interest
$ 1,643 ongoing monthly mortgage payment (including taxes and insurance of $225/month)
$ 66 trustee’s fee each month (assuming mortgage payments are made by the trustee under the plan and based on a reduced commission of 4%)
$ 1,709 monthly to keep current for 3 year duration of plan
$ 1,643 monthly to keep current for remaining 25 1/2 years of mortgage term (subject to adjustment only for taxes and insurance)
[1] Copies of the bills are available on NCLC’s website, at: http://www.nclc.org/issues/bankruptcy/index.shtml.
[2] It has generally varied over time as to which of these two indexes have been lower. For example, the annual contract interest rate for conventional fixed-rate first mortgages in 2007 was 6.34%, while the annual prime rate for that year was 8.05%. In 2004, the annual conventional fixed-rate first mortgage rate was 5.84% and the annual prime rate was 4.34%. See http://federalreserve.gov/releases/h15/data.htm.
[3] The debt-to-income guidelines are provided in the HUD handbook to implement 24 C.F.R. § 203.33.
[4] For adjustable rate mortgages with an initial teaser rate, the House bill provides that the annual percentage rate used shall be the greater of the introductory rate and the fully indexed rate.
[5] See http://federalreserve.gov/releases/h15/data.htm.
[6] See 11 U.S.C. § 101(10A).
[7] Section 1325(b)(3) references the expenses permitted under § 707(b)(2)(A) and (B).
[8] 26 U.S.C. § 108.
[9] See NCLC Reports, Bankruptcy and Foreclosures Edition, “How Congress Did (or Did Not) Save Your Clients from Foreclosure: The Mortgage Forgiveness Debt Relief Act of 2007” (Nov.-Dec. 2007).
posted by admin on Mar 9
Editorial from The Cleveland Plan Dealer March 9, 2008: Using bankruptcy code to help those facing foreclosure makes sense; urging banks to rework loans is insufficient Sunday, March 09, 2008U.S. economic trends are so bleak that central bankers are uttering phrases rarely used in their muted lexicons, including “fragile market conditions” and “substantial risks.”
They’ve got plenty of reasons to be glum.
February and January registered the worst back-to-back job losses in five years; foreclosures have climbed to record levels; and home values have fallen so far that - for the first time since the Federal Reserve began tracking this in 1945 - the debt Americans owe on their mortgages surpasses the equity they’ve built up in their homes.
Economists no longer speculate about the risk of recession, but about its length and depth.
Ben Bernanke, Federal Reserve chairman, has stepped up pressure on banks to rework mortgage terms for borrowers who can’t afford their loan payments and can’t refinance because of plunging home values.
It’s a reasonable enough premise, but too few lenders are heeding the call. Instead, they’re tightening credit standards across the board.
There’s no time to delay crafting a workable response, because foreclosures - which erode the equity of not only the families affected but that of their neighbors and their communities, too - are going to soar.
One approach would be to amend the bankruptcy code. A bill sponsored by Senate Majority Leader Harry Reid of Nevada would allow judges to modify mortgages on primary residences, which isn’t currently allowed.
Restructuring and reamortizing debt is the “heart and soul of the bankruptcy process,” J. Rich Leonard, a judge in the U.S. Bankruptcy Court for the Eastern District of North Carolina wrote recently. It’s done frequently with any debt - except that which is secured by the family home - including yachts and holiday homes.
“Bankruptcy courts are often the canaries in the mine shaft, noticing changes in the economy before they become readily apparent to others,”
the judge wrote. They see mortgages with extremely high interest rates and payments far bigger than what the debtor could afford under any reasonable underwriting standards, according to the judge.
Under the bill, judges would use a formula to set an interest rate and loan value for borrowers who met certain criteria. That would offer transparency and predictability.
This plan wouldn’t help everyone. In Ohio, fewer than half of the homeowners facing foreclosure file for bankruptcy, which mars credit reports and imposes tight financial limits for years.
Still, this approach could help keep 600,000 Americans in their homes.
That should be lenders’ goal because it also keeps payments coming in.
But without changes to the bankruptcy code, lenders have little incentive to rework loans.
Senate Democrats are trying to revive the proposed bankruptcy changes, blocked recently by Republicans. Lawmakers ought to see that, despite opposition by many lenders and the White House, this is not a political issue, but an economic one. Why stand in the way of a viable option to help thousands of homeowners who, otherwise, will tumble into foreclosure?
posted by admin on Mar 9
Banking lobbyists have stymied attempts to move a housing package in the Senate because of strong opposition to the bankruptcy provision that would allow a judge to adjust the principal of a loan, a provision referred to as a “cramdown.”
The White House has threatened to veto the bill and the rewriting of bankruptcy rules would undermine current mortgages. Cramdowns, or the ability of a judge to change the terms of a primary mortage that has entered into foreclosure works something like this: if a homeowner owed $300,000 on a house valued at $200,000, the judge could write off the $100,000 difference as secured debt the lender could not recover.
Even when compromise language to cap the cramdown was proposed, it failed to gain traction in the Senate. The modification would cover only existing subprime and adjustable-rate mortgages and would allow creditors to recoup lost mortgage principal after a modification if the borrower resells the home.
The Senate bill does contain language that makes it easier for seniors to get a homestead exemption of up to $75,000 as they go through bankruptcy, allowing them to save their house during a foreclosure proceeding.
The House Judiciary Committee approved similar bankruptcy language late last year, but the measure (H.R. 3609) has yet to advance to the floor. That bill won only a single Republican vote on the House panel, suggesting any effort to move the bill in the closely divided Senate could be difficult.
The White House continues to pitch its voluntary effort of persuading lenders to refashion mortgages with at-risk borrowers who are in foreclosure proceedings, contending it would be the most efficient and less costly avenue.
The collapse of the subprime lending market triggered the continuing slump in the overall housing market. About 1.8 million subprime borrowers who took out adjustable-rate loans that reset to higher levels after an introductory period are threatened with losing their homes to foreclosure.
posted by admin on Mar 9
Dear Housemember / Senator
I am writing because I am deeply concerned about the epidemic of home
foreclosures that is devastating families, neighborhoods and our entire
economy. Voluntary actions by loan companies are not sufficient to
address the magnitude of the foreclosure problem, which is projected to
get even worse. Please prevent hundreds of thousands of foreclosures and
provide a vital boost to our economy by supporting the “Foreclosure
Prevention Act of 2008″ (S. 2636).It is hard to understand why current law allows mortgage lenders to go
to bankruptcy court when they get in trouble, but homeowners who are
struggling to keep their homes don’t have that option. A key part of S.
2636 would lift the ban that now prevents homeowners from getting
court-supervised loan modifications. This would not excuse anyone from
paying for their home, but would simply give judges the authority to
alter unaffordable loans to make payments manageable.Allowing loan modifications thro ugh the courts would impose no cost on
the U.S. Treasury, and it would strengthen the entire economy by helping
hundreds of thousands of homeowners avoid foreclosure–foreclosures that
hurt us all.
I understand that the Senate will vote on S. 2636 very soon. This is a
time to stand up for homeowners and support sustainable mortgages.
Please help restore confidence in our economy by giving your full
support to this bill.
Thank you for your consideration.
posted by admin on Mar 9
By Jeffrey H. Birnbaum
Washington Post Staff Writer
Friday, February 22, 2008; D01
proposal in Congress that would give bankruptcy judges greater latitude
to rewrite mortgages held by financially strapped homeowners.The proposal, which could come to a vote in the Senate as early as next
week, is being pushed by Democratic congressional leaders and a large
coalition of groups that includes labor unions, consumer advocates,
civil rights organizations and AARP, the powerful senior citizens’
lobby.
The legislation would allow bankruptcy judges for the first time to
alter the terms of mortgages for primary residences. Under the proposal,
borrowers could declare bankruptcy, and a judge would be able to reduce
the amount they owe as part of resolving their debts.
Currently, bankruptcy judges cannot rewrite first mortgages for primary
homes. This restriction was adopted in the 1970s to encourage banks to
provide mortgages to new home buyers.
The Democrats and their allies see the plan as an antidote to the recent
mortgage crisis, especially among low-income borrowers with subprime
loans. The legislation would prevent as many as 600,000 homeowners from
being thrown into foreclosure, its advocates say.
“We should be giving families every reasonable tool to ensure they can
keep a roof over their heads,” said Sen. Richard J. Durbin (Ill.), the
Senate’s second-ranking Democrat and author of a leading version of the
legislation.
But the banks argue that any help the proposal might provide to troubled
homeowners in the short run would be offset by the higher costs that
borrowers would have to pay to get mortgages in the future. The reason,
banks say, is that they would pass along the added risk to borrowers in
the form of higher interest rates, larger down payments or increased
closing costs.
If banks were unable to pass on the entire cost, they could be forced to
trim their profits.
“This provision is incredibly counterproductive,” said Edward L.
Yingling, president of the America Bankers Association. “We will lobby
very, very strongly against it.”
The Durbin measure is part of a larger housing assistance bill being
pushed by Democrats in the Senate. A separate version of the measure was
approved late last year, mostly along party lines, by the House
Judiciary Committee. The Bush administration has said that it opposes
both provisions as overly coercive and potentially detrimental to the
already strained mortgage market.
Lobbyists for major banks have made the proposal’s defeat a top
priority. They have been meeting at least weekly to coordinate their
efforts and have fanned out on Capitol Hill to meet with lawmakers and
their staffs.
At least a dozen industry associations have banded together to fight the
proposed legislation. They include the American Bankers Association, the
Financial Services Roundtable, the Consumer Bankers Association and the
Mortgage Bankers Association. These groups and others have signed joint
letters to lawmakers on the issue.
In one of their letters, sent to Senate leaders last week, the groups
wrote that the legislation would “have a very negative impact in the
financial markets, which are struggling in part because of difficulties
in valuing the mortgages that underlay securities and would greatly
increase the uncertainty that already exists.”
Bank lobbyists have also gone online to make their case. The mortgage
bankers have set up a Web site,
http://www.mortgagebankers.org/StopTheCramDown, that can calculate how
much mortgage costs might increase by state and by county if the Durbin
measure were to become law. “Cram down” is the industry term for a
forced easing of mortgage terms.
Supporters of the measure are also sending letters and meeting with
lawmakers. A letter urging a quick vote on the proposal was delivered to
Senate Majority Leader Harry M. Reid (Nev.) last week. It was signed by
19 organizations, including the Consumer Federation of America, the
AFL-CIO, the National Council of La Raza, the U.S. Conference of Mayors
and AARP.
The letter said, “The court-supervised modification provision is a
commonsense solution that will help families save their homes without
any cost to the U.S. Treasury, while ensuring that lenders recover at
least what they would in a foreclosure.”
The Center for Responsible Lending, a pro-consumer watchdog group that
backs Durbin’s effort, is trying to instigate voter e-mails to lawmakers
on the subject. The group’s Web site includes a page that allows people
to send electronic notes supporting the measure to their elected
representatives with just a few clicks of a mouse.
AARP spokesman Jim Dau said his group will also ramp up its efforts. It
may soon ask its activists to urge lawmakers to back the
mortgage-redrafting legislation. AARP, which is the nation’s largest
lobby group, has a list of 1.5 million volunteers whom it says it can
call upon to contact lawmakers on legislative matters.
posted by admin on Mar 9
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