Yesterday, the House Judiciary Committee held a hearing to discuss two proposed bills, H.R. 200, the “Helping Families Save Their Homes in Bankruptcy Act of 2009” and H.R. 225, the “Emergency Homeownership and Equity Protection Act", that would allow bankruptcy judges to modify the terms of certain mortgages on principal homes during bankruptcy proceedings. H.R. 200 was introduced by leadership of the House Judiciary Committee shortly after the 110th Congress convened and is identical to S. 61 introduced in the Senate the same day by Assistant Majority Leader Dick Durban (D-IL). H.R. 225 is substantially identical to H.R. 200, except for the omission of a provision in H.R. 200 that would prohibit claims arising from certain violations of consumer protection laws.
The Committee heard testimony from:
- The Honorable Brad Miller, U.S. House of Representatives (D-NC)
- The Honorable Jim Marshall, U.S. House of Representatives (D-GA)
- David Certner, Legislative Policy Director of the AARP
- Adam Levitin, Associate Professor of Law, Georgetown University Law Center
- Christopher Mayer, Senior Vice Dean, Columbia Business School
- Matthew Mason, United Autoworkers-GM Legal Services Plan
Proponents of mortgage modifications (or “cramdowns”) noted that federal programs intended to encourage lenders and mortgage servicers to voluntarily modify mortgage terms in hopes of avoiding foreclosure, such as the “Hope for Homeowners” Program, have been largely underutilized and unsuccessful. They also pointed out that, under current law, bankruptcy judges can restructure debt on planes, vacation homes, and investment properties, and asserted that this authority also should exist for a debtor’s primary residence. They emphasized the need for immediate action and their belief that bankruptcy reform may be the only way to make a significant and immediate difference in foreclosure rates.
Opponents of the bills voiced concerns that the proposed legislation would result in a lack of personal accountability, an increased number of proceedings that could overwhelm the bankruptcy courts, and a system-wide increase in mortgage interest rates which would disproportionally affect disadvantaged borrowers. Dean Mayer noted that the focus of any proposed legislation should be on loan servicers, since there is a significantly higher rate of foreclosure for securitized mortgages than there is for portfolio mortgages that are held by the lending bank. In order to reduce the rate of foreclosures for securitized loans, Mayer proposed that loan servicers receive monthly fees while the loan is performing. Mayer claimed that this would help create an incentive for loan servicers to avoid foreclosure, as opposed to the current system under which servicers make more money from foreclosure than from modification. Dean Mayer also proposed a safe harbor provision for lenders and loan servicers that would protect them from litigation resulting from good faith modification efforts.
Originally introduced in the fall of 2007, H.R. 200 has been the subject of multiple prior House and Senate hearings, but continues to face opposition primarily from Republicans and the Mortgage Bankers Association. Earlier this month, however, the CEO of Citibank sent a letter to several members of the Senate and House stating that Citibank would support the legislation if certain changes were made. The same day, Senator Dick Durbin (D-IL), Congressman John Conyers (D-MI), Senator Chris Dodd (D-CT), Senator Chuck Schumer (D-NY) and Congressman Brad Miller (D-NC) announced that an agreement was reached with Citigroup and that Citigroup would support the inclusion of a modified version of H.R. 200 in the upcoming economic stimulus package.
Yesterday, Speaker Pelosi also spoke out in favor of legislation such as that proposed in H.R. 200 and H.R. 225, stating that “[e]nacting bankruptcy legislation is a very high priority,” and that she would support this type of bankruptcy legislation either as a stand-alone bill or as language included in the upcoming stimulus package.