UPDATE: Lawmaker Moves To Tighten Restrictions On Mtge Bill
February 25 2009 - 6:09PM
Dow Jones News
Strapped borrowers would have to provide mortgage servicers some
basic financial information before having their mortgage debts
reduced by a bankruptcy judge, under an amendment to so-called
"cram-down" legislation offered by its chief U.S. House
sponsor.
The amendment could dampen slightly the impact of the
legislation, by ensuring that fewer people qualify to have the
principal balance of their mortgage loan reduced by a judge - known
as a cram down.
Proponents say the bill will act like a stick, spurring mortgage
servicers to modify more loans voluntarily, particularly once the
newly announced Obama administration incentives for such
modifications are in place.
The financial industry contends that it will raise mortgage
rates for all borrowers. Current law allows mortgages backed by
vacation properties to be crammed down in bankruptcy, but not
primary residences.
The legislation, which could hit the floor as soon as Thursday,
would also erect a safe harbor against investor lawsuits for
servicers that modify loans. And it would revamp the Hope for
Homeowners program, initiated last fall to allow troubled borrowers
to refinance into more affordable loans backed by the
government.
Allowing bankruptcy judges to cram down mortgages is by far the
most controversial measure, attracting the ire of Republicans who
proposed changes Wednesday to gut or sharply limit its scope.
In a bid to assuage critics, the measure's author, House
Judiciary Chairman John Conyers, D-Mich., proposed tightening
eligibility standards for borrowers.
Under his amendment, borrowers would have to supply servicers a
written statement of current income and expenses at least 15 days
prior to seeking a mortgage cram down, according to a text of the
amendment.
Currently, the legislation would only require borrowers to prove
they have contacted their mortgage servicer about receiving a
voluntary loan modification before seeking a court-ordered
modification. They would not have to provide any information, in
writing or over the phone.
The Conyers amendment would also require that eligible borrowers
not have a lack of good faith, meaning they don't need relief
because they can meet all the payments on their debts without
difficulty.
The Obama administration, which has supported the cram-down
legislation as a plank of its housing plan, has proposed that
borrowers prove they cooperated with requests for basic information
from mortgage servicers before filing for bankruptcy.
It also said cram downs should be limited to mortgages no bigger
than those that Fannie Mae (FNM) and Freddie Mac (FRE) buy or
guarantee. No such restrictions are included in the House bill.
Conyers' amendment would allow mortgage investors to recoup a
slightly higher share of any proceeds from the sale of a property
within five years after a court-ordered modification.
It also specifies that monthly payments after a judge modifies a
mortgage be in equal amounts and requires judges to follow Federal
Housing Administration guidelines for appraisals.
And the amendment would direct the Government Accountability
Office to conduct a study about the impact of the legislation,
including on the number of loans restructured by judges.
-By Jessica Holzer, Dow Jones Newswires; 202-862-9228;
jessica.holzer@dowjones.com