• Senators Introduce Mortgage Modification Bills
  • October 19, 2007 | Author: Travis P. Nelson
  • Law Firm: Pepper Hamilton LLP - Princeton Office
  • Two senators, representing both sides of the political aisle, Sen. Richard Durban, D-Ill., and Sen. Arlen Specter, R-Pa., each introduced competing bills designed to address and assist families at risk of losing their homes due to the pitfalls of subprime loans.

    Sen. Specter’s S. 2133, the Home Owners Mortgage and Equity Savings Act of 2007, or “HOMES Act,” would allow bankruptcy judges to prevent or delay interest rate increases and to roll back interest rates that have already reset; to waive early prepayment or prepayment penalties; and , to write-down the principal value of the loan, but only if both the debtor and creditor agree.

    Sen. Durbin’s bill, S. 2136, the Helping Families Save Their Homes in Bankruptcy Act of 2007, is largely similar to Sen. Specter’s version, with one very notable exception. Whereas Sen. Specter would allow a bankruptcy judge to reduce the principal amount of the loan only if the lender and borrower agree, Sen. Durbin would give the judge the discretion to unilaterally reduce the principal on a mortgage in accordance with what the bankruptcy judge determines is the value of the property.

    Pepper Points — These two pieces of legislation reflect the on-going pressure on lawmakers to find a way to help homeowners keep their homes. Both Senators Specter and Durbin acknowledged that the current crisis is likely the result of both consumers who over-reached in purchasing homes that they should have known that they could not afford, and lenders and brokers who provided loan products that were not optimal for the given borrower.

    Sen. Durbin’s bill, that authorizes a bankruptcy judge to effect an after-the-fact revision of contract terms, has the potential to increase costs to future home buyers. If bankruptcy judges are given the authority to revise the principal value of a loan, as Sen. Durbin proposes, lenders will adjust by increasing the cost of loans provided to future borrowers in originations. Also, refinance lenders will have to charge more interest to take into account this additional risk. This legislation, if enacted, would likely encourage homeowners to file bankruptcy petitions to take advantage of these benefits offered.