House Judiciary Amends Bankruptcy Act to Include “Clawback”

30 Jan House Judiciary Amends Bankruptcy Act to Include “Clawback”

HR 200, the House version of the “Helping Families Save Homes in Bankruptcy Act of 2009,” as reported in Northern California Mortgage Mods, was amended in committee to include a “clawback” amendment. This allows mortgage companies, whose loans are modified by a bankruptcy judge, to share in the appreciation of a house that is later sold by the home owner.

The benefit to the lender will go from 80% of any appreciation in the house’s value during the first year after modification to 20% in the 4th year. Thus the lender, whose loan exceeded the value of the property when modified by the bankruptcy court, will get a wind-fall if the house appreciates and the home-owner sells it.

Without the modification by a bankruptcy judge, the lender would end up with the house in foreclosure. Generally that means that the lender, on average, will end up with about 50% of their loan. With the modification, they rate to get 75% of the loan amount; so is it fair that they end up with 75% and a chunk of the appreciation?

Certainly, giving the lender a large chunk of a home’s appreciation is a disincentive to the homeowner to improve the house. Would you spend $15,000 on a new roof to enhance the value of your property knowing that the mortgage company is going to get 80% (or even 20%) of that additional value?

Like all dramatic changes to existing law, the devil is in the details. Just how this is going to work is not an easy problem. One thing is certain: homeowners need this legislation to save their homes, but it has to be a workable, reasonable solution.

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.
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