New Legislation May Allow Loan Modification in Bankruptcy Courts

New Legislation May Allow Loan Modification in Bankruptcy Courts

If you’re still wondering whether or not bankruptcy can save your home, the answer may lie in a potential law voted on last week. If enacted, the new legislation will allow bankruptcy judges to award principal reductions to borrowers in bankruptcy. This gives struggling borrowers a stronger foothold against foreclosure, and gives lenders a better incentive to award loan modification. The bill will only apply to mortgages signed in the past few years, and only to homes currently used as the borrower’s primary residence.

Under the new law, bankruptcy judges can write off some of the principal on troubled mortgages in addition to other loan modification measures. This move, according to President Barack Obama, is a crucial step towards the housing plan that the administration released last week.

Another key feature of the bill is a “safe harbor,” a provision offering liability protection to lenders who grant loan modifications. Rep. Brad Miller of the House Financial Services Committee (HFSC) says that this “cramdown” should urge mortgage lenders to ease mortgage terms, especially on high sub-prime mortgages.

A few experts have pointed out provisions in the law that can affect its positive impact. For one thing, the current bankruptcy process makes it hard for certain homeowners to qualify for Chapter 13 bankruptcy—the law that allows them to get loan modifications.  According to University of Iowa law professor Katie Porter, about 75% of homeowners who fall under Chapter 13 bankruptcy have unaffordable mortgages, which can be a major obstacle in bankruptcy filing.

Bankruptcy Loan Modification Bill May Help Stop Foreclosure

Families and homeowners struggling to keep their homes may soon have the government on their side. Last year, Senator Harry Reid of Nevada introduced S.2636, commonly known as the Foreclosure Prevention Act of 2008. The bill would, among other things,  allow bankruptcy judges to modify the loans of homeowners in distress to help them avoid foreclosure.

The bill has yet to become law, but if it does, it will benefit an estimated 600,000 families. The provision has three key points: to help keep borrowers in their homes, to help distressed communities recover from the housing crisis, and to help prevent foreclosures.

For homeowners:
S. 2636 will put $200 million into pre-foreclosure counseling, programs that help at-risk households weigh their options and make smarter decisions. The program will help around 500,000 families get in touch with their lenders and work out better mortgage terms.

Housing Finance Agencies (HFAs) will also issue bonds for refinancing, with an estimated $10 billion increase in the current cap. This will enable HFAs to refinance existing sub-prime loans using funds from mortgage revenue bonds, originate new mortgages for first-time buyers, and provide multi-family rentals. Increased lending will then create new jobs and generate revenue in the local, state, and federal levels.

The bill will also change the Bankruptcy Code so that judges will be allowed to modify mortgages. This will help families get loan modifications even in bankruptcy, which normally prevents them from getting modification offers.

For communities and business:
The bill will put $4 billion into the Community Development Block Grant (CDBG) to buy and rehabilitate foreclosed homes. Foreclosed properties usually sit unoccupied in the market, reducing the value of other homes in the neighborhood. With S. 2636, communities with the highest foreclosure rates can use CDBG funding to buy these homes and put them back on the market.

Businesses can also benefit from this stimulus package by filing net operating losses (NOLs) in previous years in their tax returns, making them eligible for refunds. NOLs from way back in 2001 can be carried over to the company’s 2006 and 2007 losses, increasing the current limit from two years to five. refunds. For 2006 and 2007 losses, the

Preventive measures:
Finally, S. 2636 will simplify the disclosure requirements on mortgage paperwork. The Truth in Lending Act (TILA), which has long dictated transparency measures in mortgage lending, will be extended to refinancing documents as well. Lenders will now have to disclose the mortgage terms and the maximum payment within three days after the application and no later than seven days before the deal is closed. Violators will be subject to the same penalties as the TILA provisions, with the damages for mortgage-related violations ranging from $2,000 to $5,000.

Lenders are naturally opposed to this bill, and the Senate has yet to vote on it in the next Congress session. Meanwhile, at-risk homeowners can get assistance from a loan modification law firm who can help them find better loan modification deals.

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