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Is Mortgage Cramdown the Answer to Bankruptcy Woes?
At the forefront of the ongoing financial downturn in Minnesota and across America is the collapse of the housing industry: In 2008, home prices nationwide fell by a record average of 8.2 percent.
June 13, 2009 /Seniors PR News/ -- Is Mortgage Cramdown the Answer to Bankruptcy Woes?
Article provided by Neff Law Firm, P.A.
Visit us at www.neff-law-firm.com
At the forefront of the ongoing financial downturn in Minnesota and across America is the collapse of the housing industry: In 2008, home prices nationwide fell by a record average of 8.2 percent. In the fourth quarter alone, the median US home price dropped 12 percent from a year earlier -- again, the single largest one year decline on record.
Why the steep decline in home values? As the economy at-large continues to shed jobs and an increasing number of workers find themselves with reduced pay or reduced hours, the expensive mortgages and lines of credit that households could support as little as a year ago can become insurmountable. Unable to meet their debts, homeowners -- often in the context of bankruptcy proceedings -- are forced to sell their home through foreclosure. This creates a cyclical downward pressure on home prices, as houses sold at below-market value through foreclosure or under the threat of impending foreclosure drive down values for neighboring homes.
Faced with this dilemma, the US House of Representatives recently passed a bill intended to stabilize home prices and help struggling homeowners stay in their residences. The Helping Families Save Their Home Act -- widely referred to as the cramdown bill -- is designed to allow bankruptcy judges to modify home loans, most often by lengthening the terms of the loan, reducing the interest rates on the mortgage, or cutting the principal payments due.
The idea of allowing bankruptcy judges the power to modify loan agreements is not new. In fact, the ability to reschedule secured debts is at the heart of Chapter 13 bankruptcy. Previously, the only secured debt that could not be rescheduled under Chapter 13 was a mortgage on a debtor's primary residence.
This primary residence exception in current bankruptcy law left plenty of room for bankruptcy judges to modify -- cram down -- certain mortgage loans. According to 11 USC 1332, any individual filing Chapter 13 bankruptcy is allowed to: "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, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims." (Emphasis added.)
Because the statute expressly excludes only debts secured by an interest in the debtor's principal residence, bankruptcy judges have interpreted this provision to allow the modification mortgages on all sorts of non-owner occupied property, including rental homes, vacation property and farmsteads. In fact, in certain instances even a second mortgage on a bankrupt debtor's principal residence can be modified under the current statute, such as when the home has fallen in value to less than the amount secured by the first mortgage. In that case, many bankruptcy judges will rule that the second mortgage is no longer secured by equity in the home, and allow that loan to be modified in the course of bankruptcy proceedings.
Still, under current law, any homeowner forced to file bankruptcy who has an outstanding first mortgage on his or her primary residence is left with only two options: find a way to make good on all overdue and existing mortgage payments, or surrender the home through foreclosure. The cramdown bill is intended to allow debtors a third choice: to work with bankruptcy judges to modify their mortgage loans to terms that will reduce their debt load, but still allow them to remain in their homes.
Under the bill, bankruptcy judges would not be forced into any standard formula for mortgage modification, but would be allowed to look at the specifics of each situation and make any modifications based on the merits. Lest bankruptcy be seen as too easy a solution for troubled homeowners -- an assessment that anyone who has endured Chapter 13 bankruptcy proceedings would likely dispute -- this legislation requires homeowners to have made a good faith effort to modify their mortgage through their mortgage lender before they can appeal to the bankruptcy court.
If approved by the Senate and passed into law, this new bill does give struggling homeowner's some hope that they may not have to lose their house through foreclosure. It must be emphasized, however, that these proposed measures will do nothing to help those currently in bankruptcy, or even those considering bankruptcy in the near future.
Article provided by Neff Law Firm, P.A.
Visit us at www.neff-law-firm.com
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