Mortgage Bankruptcy Bill Passed by Congress

congress-house1After almost two years, it now looks like bankruptcy judges will soon be allowed to offer loan modifications through bankruptcy court as a last resort for a homeowner to stop foreclosure.

The process of claiming bankruptcy on your mortgage has been dubbed “cramdown.”

Under current BK laws, bankruptcy courts may reduce many forms of debt for struggling borrowers. Including but not limited to, boats, cars, vacation homes or family farms. But until now, not a primary residence.

The bankruptcy measure was approved by a 234-191 vote on Thursday in the U.S. House of Representatives.

It is reported that the new mortgage bankruptcy law will protect homeowners who cannot get help from their mortgage servicers by giving judges legal power to force the bank to either cut the interest rate on a home mortgage, the principle balance or all the above on a borrower’s primary residence.

This will take the important decision of to foreclose or not to foreclose out of the mortgage servicers hands in some cases and allow bankruptcy judges to have the 100% discretion to decide what is affordable long term for the homeowner. Meaning a long-term affordable loan modification.

A qualified loan modification will most likely will have to meet the standards set forth in Obama’s new Home Affordable Loan Modification Program that was announced on March 4 as part of his new housing rescue plan. The plan calls for lenders to cut a borrower’s monthly payment to as an affordable 31 percent of gross income by first reducing the interest rate on their mortgage and then possibly lengthening the repayment terms to make the loan payments even easier for the struggling borrower.

Homeowners wishing to take advantage of the new bankruptcy bill will have to comply with the provisions set forth in order to qualify. This would include the reimbursement to your lender for a portion of losses if the property is sold before the debtor completes a five-year bankruptcy repayment plan.

Chapter 13 of the bankruptcy code allows individuals with regular income to pay all or part of their debts without losing their homes to foreclosure. Chapter 13 of the bankruptcy code allows individuals with regular income to pay all or part of their debts without losing their homes to foreclosure.

The new bill will definitely result in more Chapter 13 bankruptcy filings by struggling homeowners. It is reported that at least 1 million borrowers will to benefit from the bill.

From Bloomberg:

“When it comes to housing, today is another example of why taxpayers are fed up with the way Washington works,” he said. “The American people are sick and tired of Washington forcing taxpayers to pay for those who have been irresponsible.”

But Michael Calhoun, president of the Center for Responsible Lending, a homeowner advocacy group, praised the House’s passage of the bill.

“Hundreds of thousands of families have lost their homes unnecessarily and tens of millions of neighboring families havewatched the value of their homes plummet. We urge the Senate to act quickly to approve this bill and put it on President Obama’s desk for his signature,” Calhoun said.

‘Not Perfect’

“This bill’s not perfect, but the process has worked better than anyone expected,” Representative Ellen Tauscher, a California Democrat and chairwoman of the New Democrat Coalition, said on the House floor. “Over the last couple of weeks we’ve worked together to make improvements to make sure bankruptcy is an option of last resort.”

The Senate may vote on a companion bill as early as next week, said Jim Manley, a spokesman for Majority Leader Harry Reid of Nevada.

The U.S. recession cut residential property values by $2.4 trillion, to $19.1 trillion, in 2008, according to estimates released this week by First American CoreLogic, a Santa Ana, California-based seller of mortgage and economic data.

House Republican Leader John Boehner of Ohio said the cram- down legislation was “disingenuously” titled the “Helping Families Save their Homes Act.”

“The measure forces those who have acted responsibly to subsidize scam artists, speculators and those who knowingly made bad decisions,” Boehner said in an e-mailed statement.

Read more from Bloomberg


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