Problem: Loan Modifications Have Mostly Been a Failure

• Recent voluntary efforts to modify mortgages have failed woefully. According to a recently-published study, almost half of the most recent so-called foreclosure prevention efforts actually increased the monthly payments of homeowners -- with most ending up in default again within 6 months.
   
• With housing prices falling, homeowners facing foreclosure are unable to get out from under an unaffordable mortgage by selling.
   
• The huge volume of foreclosures is further driving home prices down -- fueled by lenders looking to cut their losses by dumping repossesed homes on the market.

Solution: Tax-Free Mortgage "Cramdowns"

Bankruptcy modifications, commonly known as "cramdowns" is at the heart of Durbin's bill. Today, virtually every type of personal debt, including multifamily homes, vacation homes, investment properties and family farms, can be restructured in bankruptcy with the exception of the secured debt on mortgages of primary single-famly residence. This exception dates to the 1970's, when most mortgages were fixed rate, long term agreements between local bankers and their neighborhood customers. The mortgage market has changed considerably since the 1970's, and mortgages on primary residences are often now the primary cause of financial distress.

Durbin's bill would help the bankruptcy code catch up with these changes in the mortgage market. The bill would help the bankruptcy code catch up with these changes in the mortgage market and end the exception.  By making the changes the idea is that you'd now have an effective way to keep struggling homeowners in their houses.

The bill would cost taxpayers nothing and would hep families save their homes by:

• Eliminating a provision of the bankruptcy law that prohibits modifications to mortgage loans on a debtor's principal residence, so that primary mortgages are treated the same as vacation homes and family farms.
• Extending the time frame debtors are allowed for repayment, in order to reduce monthly payments to make the mortgage more affordable.
• Permitting bankruptcy judges to replace escalating variable interest rates with a new interest rate that will keep the mortgage affordable over the long term while also compensating creditors appropriately for risk.
• Waiving the bankruptcy counseling requirement for families for whom foreclosure will soon commence, so that precious time is not lost as families fight to save their homes.
• Ensuring lenders provide proper notice when assessing fees and allow judges to waive prepayment penalties.
• Maintaining debtors' legal claims against predatory lenders while in bankruptcy.