On January 6, 2009, Senator Richard Durbin (D-IL) re-introduced H.R. 200, “Helping Families Save Their Homes in Bankruptcy Act.” First introduced in the fall of 2007 by Durbin in the Senate and by Rep. John Conyers (D-MI) in the House, this bill has been the subject of three hearings, but faces opposition primarily from Republicans and representatives of the mortgage industry. When first introduced, approximately 2 million homeowners were at risk of foreclosure, but currently 8.1 million homeowners, approximately 16 percent of all homeowners, are at risk of foreclosure. In pertinent part, the bill would amend the bankruptcy code to allow bankruptcy courts to modify the terms of a mortgage loan on the primary residence of a borrower in a Chapter 13 proceeding. The amendment would not apply to Chapter 7 proceedings.

Yesterday, Vikram Pandit, CEO of Citibank, sent a letter to several members of the Senate and House signaling Citi’s support of the legislation, provided that the following changes are made:

  • Restrict eligibility to existing mortgages only;
  • Limit bankruptcy judges to void mortgages for major violations of the Truth in Lending Act (TILA) that give rise to a right of recession under TILA; and
  • Require homeowners to certify that they attempted to contact their lender regarding loan modifications before filing for bankruptcy.  

With bill advocates Senators Durbin, Chris Dodd (D-CT), Chuck Schumer (D-NY) and Rep. John Conyers (D-MI) agreeing to the changes, Durbin noted that “The support of one of the country’s biggest lenders will hopefully spur other lenders to act. I applaud Citigroup for supporting what is in the interests of their customers as well as their own best interests as a financial institution, and I hope others will quickly follow in their footsteps. We can’t end the economic crisis until we address its root cause: the massive housing crisis facing our nation.”

However, the Mortgage Bankers Association (MBA), a vocal opponent of the legislation, indicated its intent to continue to fight the legislation. “We remain opposed to bankruptcy cram down legislation because of the destabilizing effect it will have on an already turbulent mortgage market,” stated John Courson, President and CEO, and David G. Kittle, CMB Chairman of the MBA. “We were surprised by the suddenness of the announcement and are still evaluating the proposed deal, but we believe there remain a number of crucial issues that need to be addressed.”