Senate to Vote This Week on S.2636: Bankruptcy Loan Modification for Distressed Home Mortgage Borrowers

24 Feb Senate to Vote This Week on S.2636: Bankruptcy Loan Modification for Distressed Home Mortgage Borrowers

Senate Bill 2636 (introduced by Harry Reid, D, NV), which contains a provision that would allow a bankruptcy judge to modify a distressed home mortgage loan in chapter 13 bankruptcy, will be up for a vote by the full Senate this week.

Mortgage lenders are fighting this bill, which would help 600,000 Americans save their homes from foreclosure and help communities harmed by the foreclosure crisis recover, according to the National Association of Consumer Bankruptcy Attorneys. Below is a NACBA outline of key provisions of the bill:

1) Help Keep Struggling Families in Their Homes

· Increase pre-foreclosure counseling funds ($200 million). This additional funding will help housing counselors continue their outreach to families at risk of foreclosure. These added funds should assist as many as 500,000 additional families connect with their mortgage servicer or lender to explore options that will keep them in their homes.

· Allow Housing Finance Agencies (HFAs) to Issue Bonds for Refinancings (increase current cap by $10 billion). This provision will allow housing finance agencies to use proceeds from mortgage revenue bonds to refinance subprime loans, to provide mortgages for first-time home buyers, and for multifamily rental housing. Additionally, the increased lending activity supports economic growth by creating new jobs, generating federal, state, and local revenues, and inspiring home-related consumer spending.

· Change Bankruptcy Code to Allow Judge to Modify Mortgage of Debtor (based on the Durbin bill). This title could help more than 600,000 financially-troubled families keep their homes by allowing them to modify their mortgages in bankruptcy. It eliminates a provision of the bankruptcy law that prohibits modifications to mortgage loans on the debtor’s principal residence for homeowners who meet strict income and expense criteria. With this change, primary mortgages are treated the same as vacation homes and family farms.

2) Help Communities Harmed by Foreclosures Recover

· CDBG Money for Purchase and Rehab of Foreclosed Properties ($4 billion). Homes that have been foreclosed and are sitting unoccupied on the market can sap neighboring homes of their value. This provision allows localities with the highest foreclosure numbers and rates access CDBG funds to use toward purchasing these properties, rehabilitate them if necessary and rent or re-sell them. Productive occupancy of foreclosed homes will help stimulate economic activity and help prevent further loss of home equity in struggling neighborhoods.

· Net Operating Loss Carry Back from Finance Stimulus Package. For companies losing money in this economic downturn, this provision from the Senate Finance Committee’s reported stimulus bill extends a provision allowing corporations to apply excess net operating losses to tax returns from prior profitable years and receive any applicable refunds. For 2006 and 2007 losses, the “net operating loss (NOL) carryback” will be extended to five years (back to 2001) from the two years currently in law.

3) Help Families Avoid Foreclosures in the Future

· Simplified Disclosure on Mortgages Documents (based on bills introduced by Senator Reed). This provision would amend the Truth-in-Lending Act and improve the loan disclosures given to homebuyers not only when they apply for a home purchase loan, but also when they refinance their home. The measure would require: (i) firm disclosure of the terms of the mortgage loan within 3 days of application (and not later than 7 days before closing); and (ii) the maximum loan payment be disclosed, not only at application, but also seven days before closing. Finally, this provision would clarify that lenders are subject to statutory damages for violations of Truth-in-Lending disclosure provisions and increase the damages for mortgage violations from $2,000 to $5,000 per violation.

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Jill Michaux has helped Kansas consumers with debt problems for three decades. She and her partner, Mark Neis, are Topeka's only bankruptcy specialists, board certified in consumer bankruptcy law by the American Board of Certification. She help start the National Association of Consumer Bankruptcy Attorneys.
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