Support Title IV of the Foreclosure Prevention Act
Recipient: U.S. Senate
We, the undersigned civil rights, consumer, and labor organizations, strongly urge you to support Title IV of S. 2636, the “Foreclosure Prevention Act.” There is growing agreement among leading regulators, economists, and other experts that mortgage loan balances must be reduced to avoid unnecessary foreclosures that will further damage the economy. Simply reducing or freezing the interest rate is not enough since millions of U.S. homeowners with “negative equity” are not able to sell or refinance into more affordable loans.
What is the answer? Title IV of S. 2636 will permit bankruptcy courts to restructure mortgages on a family’s home under Chapter 13 of the bankruptcy code. It will give bankruptcy judges, within guidelines set by Congress, the narrow authority to modify some harmful mortgages marketed by nontraditional subprime lenders in recent years, in order to provide families with a chance to save their homes from foreclosure.
Congress needs to act now in a meaningful way on the worsening American foreclosure crisis. The good news is that the changes we seek to the bankruptcy code – which now provides similar relief for mortgages on vacation homes, investment properties, commercial properties, and family farms – would help 600,000 families avoid foreclosure and stay in their homes. The bankruptcy measure will not cost one dime of taxpayer money. No one gets “bailed out” under this solution. No one “gets off scot-free” under this solution. Instead, relief under the bankruptcy code holds both the borrowers and lenders responsible and each benefits from and pays a price for the modified loan. It does not reward speculators or others who tried to “game the system.”
The bankruptcy solution in Title IV is narrowly drawn and will:
- Apply only to existing loans;
- Apply only in cases where the homeowner has a subprime or non-traditional loan;
- Apply only in cases where the homeowner meets a congressionally-mandated IRS means test demonstrating that they do not have the ability to make their mortgage payments;
- Apply only in cases where the homeowner otherwise would lose their home to foreclosure; and
- Allow the lender/investor to recapture any price appreciation if the home is sold before the plan is completed.
The bankruptcy relief to families in Title IV of S. 2636 recognizes that the laudable voluntary programs now in place, along with those contemplated under legislation being prepared by Senate Banking Committee Chairman Chris Dodd, are important components of the solution. However, these are voluntary programs, and only a fraction of the homeowners in need of the relief are being helped. More mortgages are not being modified because most of these loans are “securitized” (i.e., packaged as investments) and there are conflicting financial interests among the different players involved: (1) loan servicers frequently fear that modifications will trigger lawsuits by investors; (2) the common presence of “piggyback second mortgages” often precludes the modification of both mortgages because the second mortgage holder has no incentive to cooperate; and (3) loan servicers often have stronger financial incentives to foreclose. Title IV of S. 2636 will complement these programs by giving lenders an incentive to participate in them in order to avoid relief over which they have less control.
Given the obstacles to voluntary modifications, the only way to achieve meaningful loan modifications on a larger scale is to permit courts to restructure mortgages on family homes under Chapter 13 of the bankruptcy code. Opponents of the bankruptcy solution claim that it would make credit more expensive. We certainly take such concerns seriously. However, those claims have not been substantiated and credible independent analyses have suggested otherwise. Because Title IV applies only to existing loans in which foreclosure is imminent, it is difficult, at best, to see how it would lead to higher interest rates on loans to which the provisions would not even apply.
Finally, we urge you to oppose any effort to strike Title IV from S. 2636 during debate on the bill. While other provisions of the bill are commendable and will go a long way toward helping communities deal with the aftermath of the foreclosures that have already occurred, they are unlikely to help homeowners avoid foreclosure in the first place. Title IV of S. 2636 fills that need.
We strongly urge you to support Title IV of S. 2636, the “Foreclosure Prevention Act,” and to oppose any effort to strike it from the bill. If you have any questions, please feel free to contact Rob Randhava, LCCR Counsel, at 202-466-6058.
American-Arab Anti-Discrimination Committee
American Association of People with Disabilities
American Federation of Labor – Congress of Industrial Organizations
Center for Responsible Lending
Community Action Partnership
Consumer Federation of America
International Union, United Auto Workers
Lawyers Committee for Civil Rights Under Law
Leadership Conference on Civil Rights
NAACP Legal Defense & Educational Fund, Inc.
National Association for the Advancement of Colored People (NAACP)
National Association of Consumer Bankruptcy Attorneys
National Association of Neighborhoods
National Association of Social Workers
National Coalition on Black Civic Participation
National Consumer Law Center (on behalf of its low-income clients)
National Council of La Raza
National Federation of Filipino American Associations
National Partnership for Women & Families
National Women’s Law Center
Service Employees International Union
U.S. Conference of Mayors
U.S. Public Interest Research Group