Bankruptcy Mortgage Modification Bill Expected on House Floor Next Week

Democratic leaders are reported to be preparing to wrap the amended version of H.R. 200 (the "Helping Families Save their Homes in Bankruptcy Act of 2009") into the omnibus spending package set to come to the House floor next week.The House Judiciary Committee approved the amended bill on Tuesday.

"The Origins of the Financial Crisis"

The article "The Origins of the Financial Crisis" was released today by the Brookings Institution. The authors explain that the present financial crisis has its origins in an asset price bubble that interacted with financial innovations that hid risks, with companies that failed to follow their own risk management procedures, and with regulators who failed to restrain excessiveness. The housing market asset bubble developed as prices increased yearly from the mid-1990's to 2006 out of line with fundamentals such as household income and with an unrealistic expectation of future price increases. The financial innovations with rapidly increasing subprime lending, masked the inherent risk included Adjustable Rate Mortgages with low "teaser rates", no down-payments, and negative amortization predicated on the expectation of future increases of housing prices.

The development of private sector mortgage-backed securities backed by "non-conforming" loans with other means of "credit enhancements" allowed the growth in subprime lending. This technique of "securitizing" mortgages was developed in the 1970's by the government-sponsored entities Fannie Mae and Freddie Mac for "conforming" loans or loans below a certain dollar amount and for borrowers with good credit scores. The private sector mortgage-backed securities market remained small until the late 1990's until the investment banks developed new ways of securitizing subprime mortgages, including dividing cash flows from the mortgage-backed securities into various "tranches" with different levels of risk, high credit rating agency ratings for the highest "tranches", and "monoline" bond insurance that would pay off in the event of loan defaults. The increase in homeownership due to the availability of subprime lending increased housing demand and inflated home prices.

The article notes that during this period of new mortgage financial innovations there was an environment of easy monetary policy by the Federal Reserve and poor regulatory oversight. Financial institutions borrowed to finance their increased purchases of mortgage-related securities and created "off-balance sheet" entities that were not subject to regulatory capital requirements. The authors relate taht financial institutions turned to and relied on short-term collateralized borrowing such as repurchase agreements, so much that by 2006 investment banks were rolling over a quarter of their balance sheets every night. Once panic hit in 2007, the uncertainty over asset values caused lenders to abruptly refuse to rollover their debts and overleveraged banks found themselves undercapitalized and with assets with falling values.

The authors are shocked to find that institutions along the mortgage securitization chain grossly failed to perform adequate risk assessment with respect to the mortgage-related assets they held and traded. These institutions along the chain include the mortgage originator, the loan servicer, the mortgage-backed security issuer, and the credit rating agencies. There was a lack of due diligence in each link in the securitization chain and instead there was a reliance on computer models.

The article finds that due to the nature of the securitization model, financial institutions had little concern about the risks in the mortgage-related assets as they were able to pass the risk down the chain -- the so called "originate to sell" model. The authors question why the ultimate buyers of the mortgage-backed securities failed to understand the involved risk. They suggest that factors were that the ultimate buyers were caught up in the "bubble mentality" as were the others, the complexity of the securitization system, reliance on rating agencies, and complex flawed computer models.

House Judiciary Committee Approves Chapter 13 Bankruptcy Mortgage Modification Bill

It was announced late today that the House Judiciary Committee approved an amended version of H.R. 200 (the "Helping Families Save their Homes in Bankruptcy Act of 2009") which would permit bankruptcy courts to modify mortgages on principal residences in Chapter 13 bankruptcy. The bill will now move to the full House where leaders hope to move the bill quickly.

Amendments to the bill were adopted to exempt FHA and VA loans from modification. A provision was also added to provide for a measure (decreasing with each year) of shared subsequent increase in value with modified mortgage lenders if the home is sold before the Chapter 13 case is discharged.

Judiciary Committee set to Markup H.R. 200 Bankruptcy Mortgage Modification Bill

The House Judiciary Committee reports that it will markup H.R. 200 the"Helping Families Save their Homes in Bankruptcy Act of 2009" on Tuesday, January 27, 2009. H.R. 200 was introduced on January 6, 2009 and would amend federal bankruptcy law to allow modification of mortgages on a person's principal residence. Presently, modification of a mortgage on a person's principal residence is only allowed for a junior mortgage that is wholly unsecured (ie. "underwater"). In a markup session, committee members may make opening statements and offer amendments to sections of the proposed bill. H.R.225 and S.61 are related bills.

"Top Priority" for Bankruptcy Code Change for Mortgage Modification, Congressional Hearings Held

The media reported today that Speaker of the House, Nancy Pelosi (D-Calif.) stated today that the Bankruptcy Code change to allow judges to modify mortgages on principal residences of chapter 13 debtors is a top priority and that Congress may move quickly to enact the amendments. House Majority Leader Steny Hoyer (D-Md.) stated that he belives that there is sufficient support in both houses of Congress to pass the bill as a stand-alone bill.

The House Judiciary Committee today held hearings on the amendment measures that were introduced by John Conyers (D-Mich.) as H.R. 200, the “Helping Families Save Their Homes in Bankruptcy Act of 2009" as well as H.R. 225, the "Emergency Homeownership and Equity Protection Act," introduced by Rep. Brad Miller (D-N.C.).

Professor Adam J. Levitin of the Georgetown University Law Center testified in favor of the bills. He stated that the bills would "significantly help ease the nationwide foreclosure crisis and stabilize financial markets." He made four major points in his testimony: 1. that voluntary, private-market attempts to manage the foreclosure crisis have failed, 2. that bankruptcy reorganization is the only method that can fully address the issues inherent due to mortgage securitization, including fragmentation of mortgage ownership, 3. that the modification of mortgages in bankruptcy will not result in higher interest rates or effect the availability of credit, and 4. that bankruptcy modification does not create issues of "moral hazard" or windfall. He pointed out that foreclosure is not a desirable outcome for borrowers, lenders or municipalities. He referred to a study that found that a single foreclosure can cost the city of Chicago over $30,000.00.

Congressman Miller's Bill H.R. 225 Introduced

As previously anticipated, Congressman Brad Miller introduced H.R. 225 into Congress on January 7, 2009 together with 34 cosponsors. The bill is identical to Senator Durbin's bankruptcy mortgage modification bill S.60 except certain minor parts. The bill was referred to the House Committe on the Judiciary.

Citigroup On Board with Bankruptcy Mortgage Modification

In a news conference this afternoon,Senate Democratic leaders announced that Citigroup has endorsed the recently introduced bankruptcy bills S.61 and HR 200 which will allow Bankruptcy Judges to modify ("cramdown") mortgages on principal residences. This proposal will generally allow troubled homeowners with mortgage debt in excess of the home's value to be able to reduce the amount owed, the interest rates, and the mortgage's term. The bill will apply to all mortgages made prior to the enactment of the bill. It is anticipated that Citigroup's endorsement of the proposal will make it easier to bring other larger lenders on board quickly.

The media also reports that the National Association of Home Builders has also reversed its previous opposition to mortgage cramdown.

Bankruptcy Mortgage Modification Plan Introduced in New Congress

Today on the first day of the new 111th Congress, Senator Richard Durbin (D, IL) introduced S. 61, the "Helping Families Save Their Homes in Bankruptcy Act." Representative John Conyers (D, MI), chairman of the House Judiciary Committee, introduced identical legislation in the House in H.200. The bills propose various changes to the Bankruptcy Code to allow certain modifications of mortgages on principal residences, including as to reduction in amount amount, modification in interest rates, and extension of length of payment. It is reported that Representative Brad Miller (D, NC) will soon introduce another bill with a similar plan for mortgage modification.

It is reported that plans for moving the legislation are somewhat unclear although there are efforts being made to include the legislation in the economic recovery plan now being drafted by Congress and or in other broader packages expected to move early in the new Congress such as "TARP 2". The plan could become law quickly if it is included in an economic stimulus package being drafted now by congressional leaders or it could take many months to work its way through Congress.

It is also noted that today 23 state attorneys general sent letters to Congress endorsing mortgage modification in bankruptcy.

Primary Residence "Cram Down" Legislation Reported to be Introduced in Congress Today

The media reports that mortgage "cram down" legislation designed to help Americans save their homes from foreclosure by allowing bankruptcy judges to modify some mortgage debt will be introduced by Congressional Democrats today. Supporters are confident that the legislation will pass into law this time as the housing crisis has significantly worsened. Senator Richard Durbin of Illinois has promised to push for the new bankruptcy provisions to be included in an economic stimulus package being drafted by Congressional Democrats.