Miami and South Florida Homeowner Underwater on Mortgages May Have Second Chance At Bankruptcy Reform to Cram Down Mortgages and Stop Foreclosures

August 10, 2009

There is still hope on the bankruptcy horizon for Miami and South Florida homeowners facing foreclosures and striking out on loan modifications. Senator Dick Durbin and other Democrats in the U.S. Senate are not giving up on legislation to permit federal bankruptcy judges to alter mortgages and keep families in their homes.

This legislation was struck down earlier this year. However, the Senate Subcommittee on Administrative Oversight and the Courts agree that current foreclosure relief efforts are disappointing so far. Both Senators and Experts agree that voluntary loan modification and short sale programs by loan servicers are not helping enough. The door remains open to new leverage that can force Lenders to the table.

The newly revived legislation calls for a bankruptcy judge to modify primary mortgages by a "cramdown" in a Chapter 13 case. In Miami and South Florida, where almost half of the homes are underwater or upside-down, cram down means the bankruptcy judge reduces the principal loan balance to the current value of the home. The legislation also permits Judges to reduce interest rates and extend repayment terms up to 40 years. Chapter 13 currently permits cram downs of almost any loan except the first mortgage on primary residence.

Back in April of 2009, the Senate voted against an amendment to the housing bill that would allow the mortgage cramdown to become law. The vote was only 45-51. Opposition to the bill argues that a bankruptcy cram-down would mean fewer lenders making loans and higher mortgage rates. There is also a strong belief that Lenders should not shoulder the burden of bad investments.

Those in favor of the bill argue these past two years of voluntary loan modifications have not stemmed the crisis. They believe the threat of bankruptcy judges forcing lenders to make realistic modifications is enough to bring them to the table. This would have an immediate effect at no additional taxpayers' expense. The new bankruptcy law would guarantee lenders recover as much as they would by foreclosure.

So far, no lawmaker has reintroduced cramdown legislation since the April 30 defeat. However, Senator Dick Durbin has promised to do so at the first available opportunity.