Lenders beware. The "Helping Families Save Their Homes Act of 2009" bill, which would change chapter 13 to allow bankruptcy judges the ability to modify home mortgages, has passed the House. Though the bill sounds appealing on the surface, underlying issues may create a potential legislative nightmare for the residential mortgage lending industry.
If enacted, its provisions could devastate the mortgage markets as we know them. Such provisions could influence bankruptcy judges to apply similar concepts in commercial lenders' chapter 11 cases, at great cost to lenders.
Scope of the Bill
Currently, chapter 13 bankruptcy law does not allow a bankruptcy judge to modify the terms of an existing home mortgage. Any debtor who wishes to retain a primary residence on which there is a mortgage must continue to pay, even if the debtor gains court approval of a chapter 13 wage earner plan that otherwise modifies debts. The proposed legislation would subvert this social compact, which has run for over 30 years.
Billions of dollars may be lost as underwater homeowners rush to re-write mortgages on terms to which no lender would have initially agreed. Though the legislation purports to apply only to chapter 13 cases, debtor-sympathetic bankruptcy judges may look to the chapter 13 40-year term authority as a "guideline" for decisions regarding what modifications of commercial loans are "fair and equitable" in chapter 11 cases. Various courts have viewed past chapter 13 loan modification decisions as instructive for chapter 11 cases. Thus, if this chapter 13 legislation becomes law, bankruptcy judges may be tempted to apply some of these new chapter 13 provisions to chapter 11 commercial loan cram-down cases.
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