House Judiciary to Consider ‘Compromise’ on Mortgage Bankruptcy Reform

Numerous sources confirmed today that a compromise on mortgage bankruptcy reform — the so-called ‘mortgage cram-down proposal’ — has been approved in principle by a number of interest groups and members of the House Judiciary Committee. In some confirmation of this, the House Judiciary Committee said in a statement Tuesday that a substitute version of the Miller-Sánchez “Emergency Homeownership and Mortgage Equity Protection Act of 2007” (H.R. 3609) is expected to be offered as part of a manager’s amendment at mark-up on Wednesday. The House Judiciary said that the substitute reflects a compromise made with Rep. Steve Chabot (R-OH) that “will help hundreds of thousands of homeowners save their homes from foreclosure while seeking bankruptcy to reorganize their debts.” H.R. 3609 would allow homeowners to avoid foreclosure by filing for a mortgage restructuring under Chapter 13 of the bankruptcy code. The provision would allow bankruptcy court judges to revise the interest rate, remaining value and maturity of the loan, and also would limit the mortgage bankruptcy option to existing subprime or non-traditional loans that are in foreclosure, or those at least 60 days in arrears. Under the agreement, the definition of a “non-traditional” loan would come from federal regulators’ subprime mortgage guidance, which applies the term to interest-only mortgages and adjustable-rate mortgages with payment options that can lead to negative amortization. The subprime definition is taken from language passed by the House in another bill, H.R. 3915. In promoting the revised bill, its sponsors say it would allow debtors to “reduce exorbitant mortgage interest rates,” “avoid onerous prepayment penalties,” as well as “set aside excessive and often secret fees charged by unscrupulous mortgage lenders” — that’s the Judiciary Committee’s language, not mine. “Today’s compromise is an important step towards safeguarding the American dream of homeownership,” said Congresswoman Linda Sánchez (D-CA). “If Congress does not take robust action, the nightmare that is the sub-prime mortgage crisis will continue, with hundreds of thousands of families losing their homes and continued instability in the housing market and our economy.” It’s rather ironic to hear Ms. Sanchez pine for greater stability in housing, IMHO, because — as I’ve written before — this sort of change, if enacted, may actually have the effect of achieving the exact opposite outcome.