HR4173 Loan Modification Laws and Regulations

HR4173 Regulation
  A Bankruptcy Mortgage Modification Amendment has been introduced as part of the Wall Street Reform and Consumer Protection Act (H.R. 4173) by, among others,  Representative Conyers, a Democrat from Michigan. The bill would allow Bankruptcy Judges to modify first mortgages on consumer’s primary residences in chapter 13 bankruptcy plans. Borrowers who owe more than their homes are worth would have the opportunity to force their lender to re-write their mortgage to come in line with the value of the home. For example, a family in California who owes $275,000 on a first mortgage and has seen their home value drop from $300,000 to $150,000 in two short years, would be able to re-write their mortgage through a chapter 13 plan so that the principal amount of the mortgage debt would become $150,000 which is equal to the current value of the home. The $125,000 that represented the “underwater” portion of the mortgage would be treated as unsecured debt paid out at much less than 100% through the life of the chapter 13 plan.
Many will remember that a similar effort spearheaded by Senator Dick Durbin failed earlier this year after the proposed bill took heavy fire from the banking lobby. H.R. 4173 is very similar to Senator Durbin’s earlier reform proposals which were first introduced in 2007. Ironically, the resurgence of bankruptcy reform legislation has been caused by a complete unwillingness on the part of banks and servicers to modify mortgages. Under current law, lenders are not required to modify first mortgages on borrower’s primary residences in bankruptcy. However, borrowers who owe more than their home is worth may be able to have second or third mortgages modified. Current bankruptcy law does allow for second and third liens to be stripped from borrower’s homes.

The Bill may very well not pass as many fear that the other pieces of the Bill create to much power for the Executive Branch to oversee the extension of credit to home-owners and businesses. The Bankruptcy Amendment was hastily added to the Bill and Senate did pass by majority vote.

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The changes include creation of a Consumer Financial Protection Agency (CFPA) to (Title IV), with authority to make decisions for consumers about the kinds of mortgages, small business loans and other financial products they may access. Another innovation is a new bureaucracy called the Financial Services Oversight Council (FSOC) tasked with determining which companies are supposedly at risk and could undermine financial market stability (Title I, Subtitle G).

“The entirety of this bill -- all pinned together like this -- hasn’t even gone through committees,” said Michele Bachmann, who represents the people of Minnesota’s Sixth Congressional District. “It just went on the floor for three hours of debate. It’s a complete government control of the financial services industry and no one knows about it!”

Rep. Jeb Hensarling from Dallas, the top Republican on the Financial Institutions and Consumer Credit Subcommittee of the House Financial Services Committee and an outspoken critic of government super-spending, blasted the measure as “an assault on the fundamental economic liberties of the American citizen. You want a home mortgage -- now you have to get the approval of the federal government,” Hensarling exclaimed. “You want to offer a credit product? The federal government again. You build a successful business -- it can be torn down unless you go to the federal government on bended knee."

Andrew Moylan, Director of Government Affairs for the National Taxpayers Union, in an open letter> dated Dec. 10, called on the House to “reject bailouts, taxes, and onerous regulations in H.R. 4173.”
Moylan writes: “Perhaps most disturbingly, the bill raises taxes in order to provide a permanent, $150 billion slush fund to the newly created Financial Services Oversight Council, whose bureaucrats could bail out private institutions at their whims. The American people have been outraged by the failures of the Troubled Asset Relief Program (TARP), and yet H.R. 4173 would establish a ‘mini-TARP’ which could potentially have even less accountability and greater moral hazard. Investors will gain no certainty from such an arrangement.”

And Matt Kibbe, President and CEO of FreedomWorks, deplored/a the “new fees, regulations, and reporting requirements,” the legislation requires, and warned it would threaten jobs, global competitiveness, and economic growth.