New Help for Homeowners Who Are Underwater? Only if Congress Will Leave Well Enough Alone !!

The National Association of Consumer Bankruptcy Attorneys' Legislative Committee and Board of Directors announced a new proposal to address one of the biggest issues facing homeowners whose houses are underwater, i.e., meaning they owe more on their house than it is worth.  We already have the ability to strip of second mortgages when the second mortgage or equity line in unsecured (meaning house is worth less than owed on the first mortgage).  With the ongoing problems facing homeowners, and the advent of of the banking industry using mill type foreclosure law firms and robo-signing of mortgages causing a question as to whether the title after a foreclosure is marketable or not, there comes a breath of fresh air.

The new proposal, known as the Principal Paydown Plan, will not require legislation.  All that is necessary is for insurers, investors and government agencies to make an affirmative acceptance of a Chapter 13 Bankruptcy Plan which would contain precise provisions to help everyone involved and debtors to carry out the implementing of the plan.   Since it appears our Republican led Congress will not consider a bankruptcy mortgage cram-down provision or law, the Principal Paydown Plan should be considered to help homeowners stay in their homes, reduce the number of homes being flooded onto the market when they are surrendered in Chapter 7 bankruptcy filings, and have an overall effect of stabilizing our crumbling economy. 

The key components of a Chapter 13 Bankruptcy Principal Pay-down Plan would include:

• Restructuring the undersecured (underwater) mortgages in Chapter 13 bankruptcy case, such that the homeowner pays down the loan principal, thereby reducing the negative equity faster than with the existing loan;
• Reducing the interest rate to 0% for the three to five years the Debtor is in the Chapter 13 bankruptcy plan, letting the borrower’s entire monthly loan payment help pay down the principal amounted owed;
• Calculating the amount to be paid similar to a HAMP modification payment, i.e., at 31% of the gross income of the Debtor;
• At the end of the Chapter 13 Plan, the remaining principal balance would then be amortized over 25 years at the then current Freddie Mac survey rate.

The benefit to the Creditor is that there would be no cram-down of the principal amount which was borrowed initially by the homeowner such that the homeowner would be actually paying down the loan amount which was borrowed in the first place.  Other benefits would include:

• The borrower agreeing to a general settlement of all claims against the lender and servicer and avoiding future title and loan litigation;
• The federal government and US taxpayers’ substantial liability on Fannie Mae and Freddie Mac  owned and insured loans would be reduced;
• Private mortgage investors will benefit similarly.

If Congress would simply stay out of the way, and allow the market to recover - it would.  It will take some give and take on the part of both borrowers and lenders.  The giant foreclosure mills which have sprung up all over Florida would have to slowly wind down and actually become more accountable to the lenders by actually reviewing their cases for the ones which would benefit from this type of plan, as opposed to simply "processing paperwork" across the desks of foreclosure attorneys.