Property ManagementWashington Report: Bankruptcy Legislation
Capitol Hill has been dominated by time-consuming debates over bailouts and stimulus packages. But one controversial subject that could directly affect hundreds of thousands of home owners appears to be on a fast track to passage.
That"s the so-called "cramdown" legislation designed to keep financially-distressed owners out of foreclosure. Cramdown means a court can tell a lender: Your borrower may owe you $200,000 on the house, but the property is only worth $100,000 in today"s real estate market, so that"s all you"re owed from here on in.
Take it or leave it. You can"t foreclose.
Bills in both the House and Senate would allow bankruptcy court judges to cut - or cramdown - the loan balances owed by home owners, plus reduce the interest rate and monthly payments to affordable levels.
To qualify, borrowers will need to file for Chapter 13 bankruptcy, agree to a court-supervised household expenditures plan for up to five years, and make at least partial repayments on debts to their creditors.
Democrats in both houses of Congress have been pushing this for two years as a way to stem the sharply rising numbers of foreclosures. But until last November"s election, they didn"t have the votes in the Senate to pass it or the President who"d sign it into law.
Now they do, and the legislation could pass before the end of February.
Not surprisingly, banks and mortgage lenders hotly oppose the whole idea -- and warn that they"ll have to raise interest rates on all future borrowers if they can"t foreclose to recover what they loaned out.
But proponents of the legislation argue that all other personal assets, except a primary home mortgage, already are subject to bankruptcy court-imposed modifications under Chapter 13.
Even second homes are eligible for cramdowns in bankruptcy proceedings, they say, so why not include primary homes if it will help lower the number of foreclosures?
Though the final version of the legislation still must be negotiated between House and Senate, it"s likely it will come with three key features:
First, only mortgages closed prior to the date of enactment will be covered.
Second, all delinquent borrowers will need to contact their lenders and inform them of their intention to file for bankruptcy. That will allow lenders to put together their best offer -- including a reduction of the amount owed and the interest rate -- before the borrower actually files.
And finally, if there is an increase in the value of the house during the five year bankruptcy period, the lender will be owed some portion of it.