Washington, D.C. — On the first day of the new 111th Congress, legislation was introduced that will allow bankruptcy judges to modify mortgage loans for homeowners facing foreclosure.
The Helping Families Save Their Homes in Bankruptcy Act will ensure modification of large numbers of distressed loans without any cost to the government.
Congressman Raúl M. Grijalva is a co-sponsor of the bill.
Over the last fourteen months, nearly 8.1 million homeowners – 16 percent of all homeowners – are at risk of foreclosure. Under current rules, bankruptcy judges can’t rewrite mortgage terms on primary residences. Virtually every type of personal debt, including vacation homes and family farms, can be restructured in bankruptcy with the exception of mortgages on a primary residence. This exception dates to the 1970’s, when most mortgages were fixed rate, long term agreements between local bankers and their neighborhood customers.
This bill would help the bankruptcy code catch up with these changes in the mortgage market.
“Many families have been hit hard by our economic crisis,” said Grijalva. “We must start taking the appropriate steps to stabilize the home mortgage market. Giving homeowners the chance to restructure their loans will help more families avoid foreclosure.”
The bill would help families save their homes by:
•Eliminating a provision of the bankruptcy law that prohibits modifications to mortgage loans on a debtor’s principal residence, so that primary mortgages are treated the same as vacation homes and family farms.
•Extending the time frame debtors are allowed for repayment, in order to reduce monthly payments to make the mortgage more affordable.
•Permitting bankruptcy judges to replace escalating variable interest rates with a new interest rate that will keep the mortgage affordable over the long term while also compensating creditors appropriately for risk.
•Waiving the bankruptcy counseling requirement for families for whom foreclosure will soon commence, so that precious time is not lost as families fight to save their homes.
•Ensuring lenders provide proper notice when assessing fees and allow judges to waive prepayment penalties.
•Maintaining debtors’ legal claims against predatory lenders while in bankruptcy.
A companion bill was also introduced in the U.S. Senate by Richard Durbin (D-IL).