Helping Families Save Their Homes Act
On March 5, the House passed the Helping Families Save their Homes Act, H.R. 1106, a bill that takes a key step in putting into force President Obama’s comprehensive Homeowner Affordability and Stability Plan. This plan will help up to 7 to 9 million families restructure or refinance their mortgages to avoid foreclosure—as well as their neighbors whose own house values will drop as a result of a nearby foreclosure.
To get more families into affordable mortgages, the bill protects lenders from lawsuits for reasonable loan modifications, and fixes the Federal Housing Administration’s Hope for Homeowners program:- reducing current fees that have discouraged lenders from voluntarily participating
- offering new incentives for lenders to negotiate loan modifications with borrowers at risk of foreclosure.
This carefully balanced common-sense, practical approach will not cost taxpayers a dime, could reduce foreclosures by 20 percent, and is a key component of President Obama’s housing package.
Bankruptcy is strict with a trustee supervising the family’s finances for up to 5 years and is limited to families who prove to a judge that they will be able to repay their debts – it is not an easy way out of debt.
Recently developed improvements to the bill ensure that we avoid bankruptcy whenever possible, by first and foremost giving homeowners access to a systematic loan modification process. Families must show good faith, have taken steps to get a loan modification outside of bankruptcy, and share the increase in property value with the lender for five years, under the bill.
Stabilizing the housing market is central to restoring the American economy. We all stand to lose if we do not stop the steep decline in home prices. Home prices dropped 18 percent in the last quarter of 2008.
Nearly one in five homeowners owes more than their home is worth and many cannot refinance.
Each foreclosed home reduces nearby property values by as much as 9 percent.
The Helping Families Save their Homes Act:
Bankruptcy Provisions to Spur Refinancing to Affordable Home Loans
- Reduces home foreclosures by an estimated 20 percent (according to a study by Credit Suisse) -- by giving bankruptcy judges the ability to modify certain mortgage loans on a homeowner’s principal residence in order to establish an affordable mortgage plan for homeowners so they can continue making payments.
- Bankruptcy changes were outlined as a key component of President Obama’s housing package. “The Obama administration will seek careful changes to personal bankruptcy provisions so that bankruptcy judges can modify mortgages written in the past few years when families run out of other options.” [Treasury Department, 2/18/09]
- Permits a reduction of principal, allows the repayment period to be extended, or authorizes an exorbitant interest rate -- including those from adjustable rate mortgages or predatory loans -- to be reduced to a level that will keep the mortgage affordable over the long-term. Requires courts to consider the Administration’s debt-to-income and interest rate limits in determining how to modify the mortgage
- Applies only to existing mortgages, and would not apply to future mortgages, so that bankruptcy judges can modify mortgages when families exhaust other options.
- Families must show good faith, have taken steps to get a loan modification outside of bankruptcy, and share the increase in property value with the lender for five years.
- Requires homeowners facing foreclosure to call lenders 30 days prior to applying for judicial modification, to provide information to the lender for a loan modification offered by the lender before these homeowners can apply for judicial modification. (critical compromise worked out with in manager’s amendment)
- Ensures that a judge consider whether a loan modification consistent with President Obama’s plan was offered prior to coming to court.
- Prohibits a borrower who can afford their mortgage or a borrower convicted of mortgage fraud from modifying his or her mortgage under this legislation.
- Those going through bankruptcy must live under the supervision of a trustee and a judge, and under the observation of creditors for up to five years, and bankruptcy can remain on credit reports for up to 10 years.
- The bill does not let families escape from their financial obligations; the court can reduce the mortgage only to the current fair market value of the house. The bankruptcy court will structure payments requiring families to pay their mortgages to the greatest extent that they are able in equal monthly payments.
- Investors who own two, three or four homes are permitted to restructure their loans in bankruptcy, under current law. This should be the rule for ordinary homeowners, as a last resort alternative to foreclosure.
- Credit Suisse: “we think the bankruptcy reform will be a net positive in terms of foreclosure reduction, as it may be an effective way to improve both home equity and affordability.” [1/26/09]
- Mark Zandi, chief economist and co-founder of Moody’s Economy.com: “this legislation, which would give bankruptcy judges the authority in a Chapter 13 to modify mortgages by treating them as secured only up to the market value of the property, will significantly reduce the number of foreclosures…This would be very helpful in reducing the pressure on housing and mortgage markets and will measurably reduce the odds of recession next year… There is no more efficacious way to short-circuit this developing cycle and forestall a severe recession than passing this legislation.” [Testimony, January 2008]
- “Inaction by banks to stem foreclosures the past two years demonstrates how necessary that … [judicial modification] provision has become… Banks have been all too willing to allow foreclosures, even if they end up taking losses that loan modifications would have avoided.” [Chattanooga Time Free Press editorial, 2/20/09]
- The bill would NOT rewrite the 2005 Bankruptcy Code amendments. The current legal prohibition on modifying primary mortgages dates back to 1978 when most mortgages were 30-year fixed rate loans owned by local banks rather than the rapidly changing adjustable rate mortgages that have been originated and sold to investors widely in recent years.
Incentives for Negotiating Affordable Home Loans
- Fixes to the FHA's Hope for Homeowners program enacted as part of the comprehensive housing reform legislation from last summer. These changes specifically outlined as part of the President’s housing package:
- Lower fees paid by borrowers and lenders.
- Provide $1,000 payments to servicers for each successful refinance of existing loans.
- Provides mortgage servicers with clarity and certainty for their actions, and protection from lawsuits for specified loan modifications. Mortgage servicers are concerned about the threat of investor lawsuits if they help families in danger of losing their homes with loan modifications. This provision is critical to the success of the President’s initiative by protecting servicers that take part in loan modification programs.
- Helps veterans and other homeowners to avoid foreclosure by allowing the Department of Veterans Affairs, the Federal Housing Administration, and U.S. Department of Agriculture to guarantee and/or insure mortgage loans modified either out of court or in a bankruptcy case. This will provide financial incentives for lenders to voluntarily modify mortgage loans in lieu of foreclosure. This authority is an important provision detailed in the President’s housing package.
- Expands the FHA’s mortgage loan modification abilities to keep more people in their homes and thereby reduce foreclosures by allowing a reduction of interest payments of up to 30 percent of the outstanding loan balance.
- Prevents predatory lenders from being approved as lenders under the FHA programs.
Protecting Consumers’ Savings in Community Banks and Credit Unions
- Makes permanent an increase, from $100,000 to $250,000, in the amount insured by regulators for each account held by a consumer at a bank or credit union, and increases the these regulators’ authority to obtain additional liquidity from the US Treasury.