Page 1 - John Hundley 2009

Sharp Thinking

No. 16 Perspectives on Developments in the Law from The Sharp Law Firm, P.C. January 2009
Bankruptcy Bill Will Drastically Affect

Mortgage Lending and Foreclosure

By Terry Sharp, 618-242-0246, law@lotsharp.com
As the housing crisis deepened during 2008, one proposal to alleviate
the crisis was to amend the Bankruptcy Code to allow those who filed for
bankruptcy protection to modify their home mortgages. That proposal was
not enacted in the last Congress. However, Senator Dick Durbin of Illinois
this month introduced into the new Congress his “Helping Families Save
Their Homes in Bankruptcy Act of 2009”, which once again brings that
concept to the floor of Congress.

This time, several things have changed: the crisis has deepened;
both houses have become more heavily Democratic; a major bank which
previously opposed the concept now agrees with it; and the new President
is of the same party as the majorities in both houses of Congress – and is
a close friend (and former co-Senator from Illinois) of the bill’s sponsor. Sharp
Currently, 11 U.S.C. § 1322(b)(2) prohibits modification of creditor claims “secured only by a
security interest in real property that is the debtor’s principal residence.” Under the Durbin bill,
bankruptcy courts could modify mortgagees’ rights in any of several significant ways:
► The court may provide for payment of the claim as determined by 11 U.S.C. § 506(a)(1),
which provides that a claim is a secured claim “to the extent of the value of such creditor’s
interest in the estate’s interest in such property”, and an unsecured claim as to the remainder. In
conjunction with other provisions of the Code, this provision has long been applied to say that a
creditor whose claim was secured by first lien on a non-housing asset was treated as a secured
claim only to the extent of the fair market value of the property at the time the bankruptcy was
filed. The remainder was treated as an unsecured claim – and subject to discharge.

► The court may extend the mortgage loan repayment period to up to 40 years, less the time
that the loan has been outstanding.
► The court may change the interest rate to a fixed APR equal to the most-recently-published
annual yield on conventional mortgages published by the Board of the Federal Reserve System.
This provision apparently applies whether the previous rate was fixed or adjustable.
► On adjustable-rate mortgages (ARMs), the court also may order that the rate is no longer
adjustable, may reduce the rate, or may order that adjustment of the rate be delayed.
The first provision noted above is similar to the “cramdown” provisions brought forth in 1986 as

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Sharp Thinking is an occasional newsletter of The Sharp Law Firm, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp
Thinking shall be construed to create an attorney-client relation where none previously has existed, nor with respect to any particular matter. The perspectives herein
constitute educational material on general legal topics and are not legal advice applicable to any particular situation. To establish an attorney-client relation or to obtain legal
advice on your particular situation, contact a Sharp lawyer at the phone number or one of the addresses provided on page 2 of this newsletter.