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Mortgage re-writes (Cram Downs) |
| It's no secret that many home owners are struggling to to stay in their homes and to avoid foreclosure. No doubt it is a very stressful experience for the strapped home owner but foreclosures have an effect on other people not facing foreclosure as well. To make a long story short, when a home is sold below market value as a foreclosure it drags down the value of all properties that surround it. This has potential to cause even more foreclosures and cause the cycle to repeat itself. The program here would allow judges to modify the existing terms of a mortgage to reduce the number of foreclosure sales in an effort to stop the erosion of home values. Below are some answers to frequently asked questions regarding the program. |
Questions, answers on bankruptcy mortgage rewrites
Q. Who is eligible for the program?
A. Any homeowner who can prove he can´t afford his current mortgage and can prove he has tried to work out new terms from the lender holding the mortgage.
Q. Does the borrower have to do anything before filing for bankruptcy?
A. The borrower would have to contact the lender or loan servicer and ask for a change in terms, and provide his financial information including income, expenses and debts.
Q. How long will it take?
A. The homeowner will have to wait 30 days to give the lender time to offer new loan terms that the home owner can afford. If the lender does not offer new terms then he could file for bankruptcy under Chapter 13.
Q. If the mortgage company offered a workout, can a homeowner still seek one under Chapter 13?
A. Yes, but the judge could consider whether the loan servicer already offered a reasonable rewrite. The bill defines that as a deal that would bring the homeowner´s monthly payment down to about one-third of his gross income.
Q. Can´t bankruptcy judges already change the terms of home mortgages?
A. No. Under current law, bankruptcy judges have the ability to restructure other types of loans including car loans, college and vacation property. However, they cannot currently restructure loans on primary residences.
Q. What if you provided false information on your loan application?
A. The program doesn´t exclude people who were given loans in the past without submitting complete or accurate financial documentation. However, the homeowner would be required to give the bankruptcy court a good-faith plan, including proper documentation, for repaying his debts.
Q. What if the homeowner sells his home soon after declaring bankruptcy?
A. The lender would get a substantial cut of the proceeds from a sale of the home if the homeowner sold soon after finalizing his bankruptcy plan. The mortgage company would get 90 percent for a sale within one year, 70 percent after the second year, and half after three years. The amount falls over time to 10 percent in the fifth year.
Q. Does the bill help people who aren´t bankrupt but are having difficulty making their mortgage payments as promised?
A. No. The bill offers no help to people who can afford their monthly mortgage payments. Proponents believe it will help all homeowners by prodding lenders to negotiate with borrowers rather than let a bankruptcy judge rewrite the terms. Critics argue that it will hurt homeowners and would-be homeowners by prompting mortgage companies to raise interest rates to cover losses they might suffer if their loans are subject to judicial changes.
The House bill is HR 1106. The legislation is not yet final and more changes may be made.