House approves bill to let judges modify loans
Based on Citi , the measure only gives bankruptcy judges the authority to modify mortgages that were set up prior to the enactment of the bill. The legislation also includes a provision giving home loan servicers legal protection if they modify mortgages. Loan servicers have been apprehensive about agreeing to modify mortgages because of the possibility that mortgage investors would file lawsuits against them for violating contracts.
It is also unclear whether the measure will have support in the Senate. However, Senate Majority leader Harry Reid, D-Nevada, said he believes he has the votes to confirm passage. The measure will likely require the support of a few GOP Senators. A spokeswoman for Sen. Mel Martinez, R-Fla., said he is considering the legislation. Like many other states, Florida has an unusually large number of troubled homeowners and foreclosures.
Many of the 67 members of the centrist New Democratic Coalition voted to support the measure after a series of provisions they introduced were included into the overall bill.
Earlier this week, a series of new measures sought by the group were included in the bill. One provision requires a judge to consider whether a borrower has been offered a loan modification by the holder of the mortgage prior to modifying. Any modification has to meet the guidelines set up by an Obama Administration for what is affordable to a homeowner. The Obama plan provides government funds to help lenders modify mortgages down to 31% of a borrower's pre-tax income.
The legislation also requires bankruptcy judges to consider whether to use an interest rate reduction when modifying mortgages prior to considering reduction of the principal.
The group, lead by Rep. Ellen Tauscher, D-Calif., succeeded at including in the legislation a measure that would create some additional uniformity when it comes to what kind of modification bankruptcy judges agree to. One other provision requires judges to use Federal Housing Administration appraisal guidelines to consider the property's "fair value." Also, judges would have to require borrowers to pay a uniform amount each month, rather than varied amounts.
Also, struggling homeowners would need to certify that they actually have talked to their loan servicer to see if a modification can be made instead of bankruptcy. The borrower would need to provide the servicer with their tax return, for example, to prove their income, he said.
Many GOP lawmakers are opposed to the legislation that they argue will increase the price of mortgages overall by forcing mortgage investors to lose capital on some troubled mortgages leading them to raise the price of other mortgages.
Lawmakers voted down a GOP mortgage modification proposal introduced by Rep. Tom Price, R-Ga., 182-242. Price's measure would have allowed a lender that was required by a bankruptcy judge to modify the principal of a mortgage to recover the entire amount of the principal modification if the borrower profits from selling the home.
"This bill redistributes wealth from responsible taxpayers and rewards irresponsible borrowers and undermining the efforts undertaken by the government to stabilize the markets," Price said.
Lawmakers also rejected a measure that would prohibit the use of government funds to modify mortgages for individuals that "lied about their income on their mortgage application."
Price's measure would have also prohibited government funding to any lender that failed to follow proper underwriting standards, such as in situations where it encouraged borrowers to lie about their income.