Phoenix Bankruptcy Attorney Blog

Below is the text of a recent story about the possibility of so-called “cram down” legislation finally making its way through Congress. If the legislation passes it will benefit many homeowners in Arizona who seek bankruptcy protection. The bill would allow a bankruptcy Judge to potentially “cram down” the principal balance on a residence, subject to various limitaitons. The article states:

Wednesday, April 15, 2009
by Bill Swindell

After weeks of negotiation, a compromise may have emerged over Senate legislation that would give bankruptcy judges greater power to modify home mortgages, including reducing the principal. Lenders have been fighting the proposal, arguing that it would bring more uncertainty to the mortgage market and result in higher interest rates. But bank critics say such powers, especially allowing a judge to reduce the principal, are necessary to help homeowners on a wide basis and halt declining prices. The potential deal, according to sources, would add teeth to a House-passed bill that would allow a judge to consider whether the lender has offered the homeowner a new Obama administration plan to help up to 9 million borrowers avoid foreclosure by allowing them to refinance at lower interest rates. The Senate compromise would mandate that if a lender offered a modification through the Obama plan or a program included in last year’s housing bill, called the Hope for Homeowners Act, the homeowner would be ineligible to modify their loan through bankruptcy.

The possible deal has other provisions. At-risk low-income borrowers and those who pay less than 31 percent of their income for mortgage payments would be ineligible for principal reduction, but they could have their rates reduced or their loans amortized over a longer time. If a homeowner opted for a modification under the Obama plan and wound up paying a quarter of income or less for the mortgage, he or she would be ineligible for any bankruptcy modification. If the principal is reduced by a judge, the possible compromise would allow the lender and borrower to evenly split any profit up to the original amount of the loan if it is sold while the homeowner is still in bankruptcy. Only loans that originated before 2009 and amount to less than $729,750 could be modified in bankruptcy. The program would end in 2014.

All sides cautioned that no final deal has been struck and that negotiations could easily fall apart, especially as banks, credit unions and consumer activists each stake out their position in negotiations led by staffers for Senate Majority Whip Durbin. Citigroup Inc. signed on to an earlier compromise, but other lenders have argued that more limitations need to be placed on the availability for principal reduction. Rep. Brad Miller, D-N.C., has said that banks are reluctant to write down such losses through a process known as “cram-down” because it would show up on their already battered mortgage portfolio. “There are a variety of different proposals that are in writing. Nothing has been agreed to,” said Durbin spokesman Max Gleischman. “We were exactly at the same place we were at last week.” The measure is likely to be combined with other banking provisions, including lifting the cap on the number of business loans that credit unions can make. It would also likely expand eligibility for Hope for Homeowners and increase the FDIC’s borrowing authority up to $500 billion for a limited time to give the agency resources to address the banking sector’s problems. The FDIC language would allow the agency to lower fee assessments that it had recently increased on banks to handle the rise in failing institutions. One source said the banks believe that whatever they may lose via the expanded bankruptcy process could be made up through the lower fee assessment. Another source said the banks made the offer to Durbin and felt that he would likely accept the language.

Follow the blog to keep up to date on this pending legislation. You can also visit ourwebsite to learn more about loan modificaiton and bankruptcy.