Federal bill would let judges modify home mortgages

23 Feb

Orlando Business Journal – by Richard Bilbao

The proposed Helping Families Save Their Homes in Bankruptcy Act of 2009, for the first time ever, would let judges modify the terms of a home mortgage for someone who’s filed for personal bankruptcy.

More specifically, Senate Bill 61 and its companion bill H.R. 200, introduced in the House and Senate on Jan. 6, would allow judges to:

• Modify or reduce the principle balance on a home mortgage to its current market value, as opposed to when the home was bought.

• Stretch out a home mortgage for up to 40 years to help lower payments.

• Reduce and change a variable mortgage interest rate to a fixed-rate.

However, not every distressed home falls under the guidelines of the bill.

Both the Senate and House bills — sponsored by Sen. Richard Durbin, D-Ill., and Rep. John Conyers , D-Mich., respectively — require homeowners who’ve filed for personal bankruptcy to have:

• Been informed, beforehand, that the home will be subject to a foreclosure.

• A mortgage created prior to the date the bill passes.

• Certification that they tried and failed to negotiate a loan modification with the lender 15 days before filing for bankruptcy. However, this requirement would be waived if the home faces foreclosure within 30 days.

Modifying a loan to help a property stay out of foreclosure is common in the commercial sector, such as hotels and office buildings, as well as in some consumer sectors, such as cars.

But it’s unheard of for bankruptcy courts to modify home mortgages, said Roy Kobert, a bankruptcy attorney for Broad and Cassel in Orlando. “The present inability to modify home mortgages for Americans is the holy grail in consumer bankruptcy — it’s virtually impenetrable.”

In commercial bankruptcies, “the code permits judges to modify the mortgage amount and the interest rate, but also allows commercial lenders to participate in the appreciation of the collateral on a sliding scale basis,” he said.

That provision for residential lenders is not included in the Senate bill, but is in the House version, he said.

Risky business

Central Florida businesspeople have mixed reactions to a proposed federal law that could tip the balance of power in personal bankruptcy cases in favor of homeowners over lenders.

At least one local Realtor likes the proposed Helping Families Save Their Homes in Bankruptcy Act of 2009.

Keeping homes out of foreclosure would make them easier to sell, because prospective buyers typically don’t look at foreclosed properties, said Kathleen Gallagher McIver, a broker with Re/Max Town and Country Realty in Winter Springs.

But giving courts the power to restructure a loan may leave a bitter taste in lenders’ mouths that can backfire on homeowners, said Rob Nunziata, president of FBC Mortgage LLC, an Orlando-based mortgage broker.

The proposed law would introduce a whole new type of risk for lenders and investors, who would have to fear having a court judge change the amount of return the investor originally expected to get. “Mortgages in bankruptcy have been considered sacred, but this could change the ground rules” for lending, said Nunziata.

For example, although the plan is only for existing mortgages, this could cause lenders to raise rates on future mortgages in fear of the law being modified to include new mortgages, he said.

But the proposed law may also help lenders, said Chip Herron, an attorney with Wolff, Hill, McFarlin & Herron P.A. in Orlando. “Creditors will be better off when there’s an owner who wants [to stay in a distressed home] and continue taking care of it,” he said.

The bill, if passed, also could cause a dramatic drop in personal bankruptcy filings and foreclosures due to some homeowners wanting to work things out instead of walking away, said Herron.

“This goes a long way to solving the real estate crisis. Someone will be setting a floor to what these homes are worth instead of letting them continue to devalue.”

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