Page 10 - John Hundley 2009

Federal Bills Stall

In Washington, mortgage reform in bankruptcy has stalled, but may not yet be dead.
Sen. Dick Durbin’s bill (S. 61, see Sharp Thinking #16, Jan. 2009), sponsored in the
House by Judiciary Chair John Conyers (H.R. 200), was amended in that body and
reported to the floor, but days later Conyers introduced a separate, broader bill (H.R.
1106), which the House adopted in March.
The H.R. 200 amendments generally limited mortgage reformation in bankruptcy to
debtors who had tried to obtain voluntary modifications first; limited reformation to loans
made prior to passage of the proposal; required that the court find that the debtor had not received the
underlying mortgage by fraud; permitted the court to modify subordinate claims as well as mortgages;
narrowed the circumstances under which “truth in lending” counterclaims could be asserted; changed the
base for modified interest rates; and required that if a debtor sold the home before completing the Chapter
13 plan and received more than the debt remaining, portions of the forgiven debt had to be repaid.
H.R. 1106 generally retained those changes; added a provision that the value of the secured claim
be as of the date the court ruled; defined circumstances where modification could not be sought in good
faith; and added a provision permitting interest rate reduction (no change in principal)
where the resulting monthly payment would be consistent with the Administration’s
Homeowner Affordability & Stability Plan and the debtor could pay off the loan over
30 years. However, it also addressed a host of issues not raised in H.R. 200, such
as changes in statutes governing FHA, VA and rural housing mortgages; establish-
ment of a Mortgage Fraud Task Force in the Department of Justice; and “safe harbor”
rules for mortgage servicers who agree to modifications. Those changes sought to
harmonize the bankruptcy reforms with, and in some instances to legislatively
implement, the Obama plan, which seeks to halt foreclosures outside of bankruptcy
by encouraging voluntary mortgage modifications (see Sharp Thinking #17, Feb. 2009). Durbin
In a widely-publicized confrontation, Durbin on April 30 offered much of H.R. 1106, in a refined
form, as an amendment to S. 896, a bill on mortgage-modification sponsored by Sen. Chris Dodd.
That effort failed, causing Durbin’s widely-reported charge that banks “own the Senate”. Probably that
defeat spells the death knell for mortgage modification in bankruptcy, but perhaps not. As shown above,
the legislation has been an evolving animal, as proponents attempt to deal with critics’ objections. More-
over, advocates charge that the President really did not try to get Durbin’s amendment passed, and it
appears that success of his out-of-bankruptcy mortgage reform plan is key to his efforts in this area.
A particularly thorny issue in this respect is how one gives mortgage servicers the right to modify
mortgages they do not own. Many mortgages have been wrapped up in pools and sold off to permanent
investors; ownership of many others has been financed through mortgage-backed derivatives. How such
mortgages can be modified without rewriting pool arrangements, and without making even less
valuable the derivative instruments which started the banking meltdown last summer, is highly
problematic. The extent to which such problems can be overcome through the voluntary program plainly
affects the scope of the bankruptcy-modification the Administration may desire.

-- John Hundley, Jhundley@lotsharp.com, with Linda Kennedy, Linda@lotsharp.com.
John\Sharp Thinking\#20.doc
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