Last night, the House of Representatives approved H.R. 1106 by a vote of 234-191, permitting bankruptcy judges to cram down residential mortgages to their current value, modifying variable interest rates to a fixed annual rate and extending the repayment period of up to 40 years. This part of the bill contains identical language to other bills pending in the House. One big change is a built in sunset provision; the only loans that can be modified are those dated before the statute takes effect. Future loans may not be modified under this statute. In addition, the debtor must certify that he or she has attempted to contact the lender regarding modification of the mortgage at least 15 days before the petition is filed, unless a foreclosure sale is scheduled within 30 days. If a foreclosure sale is pending or if the debtor wants to modify a mortgage covered by a confirmed plan, the debtor must first attempt to contact the lender and try to work out a loan modification. Nothing in the statute explains how the debtor is to prove that the attempt to contact the lender was actually made.

The legislation would be immediately effective and would apply to all pending, but not closed, cases. The value of the property is the value as of the hearing date, not the date the petition was filed. This would give debtors the option to ask for mortgage cram downs on plans that have already been confirmed, even those that are four years old.  The only limitation on the provision is that the court must determine that the debtor has proposed the modification in good faith and that the debtor has not been convicted of obtaining the extension, renewal or refinancing of loan by actual fraud.

If the debtor sells the house for more than the crammed down value within five years, the lender would share in the net proceeds.

The Chapter 13 trustee’s fee on modified loans is capped at 4%, which will encourage more debtors to make regular mortgage payments through the trustee. The court may also waive the trustee’s fees for certain low income individuals.

Furthermore, there are provisions that protect servicers who agree to modify mortgages from liability to owners of interests in securitized loans. The terms of some securitization agreements will be changed, declaring certain provisions to be against public policy. This could have the effect of allowing many servicers to go forward with loan modifications, which have not been possible in the past.

All eyes are now on the Senate. If the legislation that passes in the Senate is not identical to the House version, the bills will go to a conference committee to hammer out a compromise. The compromise bill would then go back to both houses for approval and then to the President for signature.

If you have any questions on this information, please contact Mr. John L. Day, Jr., Esq. Mr. Day is a partner in the Bankruptcy Department of the Real Estate Default Group at Weltman, Weinberg & Reis Co., L.P.A. in Cincinnati, Ohio. Mr. Day can be reached at (513) 723-2206 or via e-mail at jday@weltman.com.