Colorado Bankruptcy Blog

THE ONGOING MORTGAGE-DEFAULT TORNADO HIT FANNIE MAE with ferocity last week, when the mortgage giant reported a first-quarter loss of $2.2 billion, its third quarterly loss in a row.

Rising credit costs — industry lingo for foreclosure costs and reserves against future loan charge-offs — was the primary culprit. Nor did management sound many cheery notes in the news release or conference call afterwards. They boosted the expected range of home price declines for 2008, to 7% to 9% from 5% to 7%. Therefore mortgage defaults will be even higher next year.

The company also announced a 30% cut in the quarterly dividend to marshal capital and a plan to raise $6 billion in new common and preferred equity (some $4.5 billion in new issues were priced later in the week).

Fannie Mae’s shares (ticker: FNM) fell nearly 6% for the week, closing Friday at $27.81.

We had sounded a strikingly bearish note on Fannie in a cover story earlier this year (”Is Fannie Mae Toast?” March 10). We pointed out that Fannie, by virtue of its location in the heart of the home- mortgage-market collapse, was likely to face many quarters of crippling losses that would all but deplete its capital.

We surmised that the U.S. government might be forced to nationalize the company in order to fulfill its implicit guarantee of Fannie’s huge corporate and guaranteed debt obligations. The possibility of a bailout like that has recently been getting more attention from regulators and lawmakers, as the New York Times reported in a front-page story last week.

The latest earnings report did nothing to change our gloomy view. For example, in the first quarter Fannie was forced to torch its “fair value” net worth by $23.6 billion to a paltry $12.2 billion. After subtracting $14.3 billion in net worth attributable to Fannie’s preferred stock, that left common shareholders with negative equity of about $2 billion. That’s surely not much protection against future losses on Fannie’s $3-trillion credit book.

That net-worth hit occurred in an area that our story highlighted. By our reckoning, Fannie had badly overestimated the net value of its business of guaranteeing mortgage securities, in light of the heavy losses showing up there. Its accountants apparently agreed, to the tune of the $26 billion reduction in the value of the business that Fannie took in the first quarter.

In the March-quarter numbers, Fannie also mentioned some $9.1 billion in unrealized losses, some $8 billion of which it failed to run through its income statement on the grounds that they were merely temporary. These losses come from subprime and Alt-A (a notch above subprime) securities that are likely to prove anything but temporary.

FINALLY, SOME FUNKY ASSETS ON FANNIE’S balance sheet that we’d discussed in our original story have only grown since. To wit, Fannie in its latest numbers reported that deferred-tax assets had jumped from $13 billion to $17.8 billion in the quarter. Yet as losses continue, these tax offsets to future income will have to be written down sharply, thus crushing both Fannie’s future earnings and net worth.

Bulls on Fannie look to improved profits the company is realizing on newly booked business in both its guarantee business and investment portfolio. Likewise they are counting on government regulators to be lenient with the company because of its importance in providing liquidity to the ailing home-mortgage market. After all, Fannie was able to “grow” its way out of near oblivion after the savings and loan debacle in the 1980s.

Such a turnaround now would be far more difficult, given the virulence of the current credit cycle and housing-price crisis. As one report last week noted acidly, Fannie has become the lifeguard that can’t swim.

– Jonathan R. Laing

By PAULA LAVIGNE
REGISTER STAFF WRITER

Figuring out which company to deal with during a foreclosure can be daunting. Even if the original mortgage was with a company recognized by the borrower, that company may not be the one acting against the borrower in court.

For example: Wells Fargo filed more than 3,600 foreclosure lawsuits in Iowa from January 2005 to February 2008, more than any other company identified in Iowa court data. But the company could be taking legal action because it processed payments for another mortgage company or acted as a trustee for investors - not because it’s the original lender.

Two company names that often appear on Iowa foreclosures - Deutsche Bank and Mortgage Electronic Registration System, or MERS - can be even more puzzling to borrowers.

Deutsche Bank, a global financial services firm with headquarters in Germany, may be listed as a loan’s owner of record, but it likely doesn’t have an actual stake in foreclosure proceedings. The firm acts as a trustee for investors holding mortgage-backed securities.

A loan winds up in a mortgage- backed security after it is sold by the company that originated the note. An investment bank pools that loan with others. It then sells securities, which represent a portion of the total principal and interest payments on the loans, to investors such as mutual funds, pension funds and insurance companies.

MERS, meanwhile, is neither the servicer nor the lender. Companies pay the firm to represent them and track loans as they change hands.

So while MERS should be able to point borrowers to the appropriate contact in a foreclosure proceeding, Deutsche Bank urges borrowers to contact loan servicers instead.

A tip for borrowers facing a foreclosure action: Make sure the company bringing the foreclosure action has the legal right to do so.

University of Iowa law professor Katherine Porter led a national study of 1,733 foreclosures and found that 40 percent of the creditors filing the lawsuits did not show proof of ownership. The study will be published later this year.

Companies, she said, have been “putting the burden on the consumer - who is bankrupt - to try to decide whether it’s worth it to press the issue.”

Max Gardner III, a bankruptcy attorney in North Carolina and a national foreclosure expert, said the trend is spreading to other states. “You have to prove in North Carolina that you have the original note,” he said. “Judges have not (asked for) that very often, until the last five or six months.”

MERS and Deutsche Bank faced court challenges last year over whether they had legal standing to bring a foreclosure action, with mixed results.

A federal judge in Florida ruled in favor of MERS, dismissing a class-action lawsuit that claimed the company did not have the right to initiate foreclosures. But a federal judge in Ohio ruled against Deutsche Bank, dismissing 14 foreclosure lawsuits after Deutsche Bank couldn’t provide proof of ownership. The Ohio attorney general has not been successful in getting state judges to follow suit.

In Iowa, attorneys and lending experts say they haven’t seen similar rulings against Deutsche Bank

By Ted Barrett  

WASHINGTON (CNN) — Senate leaders have agreed to move forward on stalled legislation aimed at easing the impact of the falling housing market, the chamber’s top Republican and Democrat announced Tuesday.

A homeowner relief bill is stalled in the Senate. A key vote is planned Tuesday.

“The time has come for us to legislate, not continue our bickering,” Senate Majority Leader Harry Reid, D-Nevada, told reporters.

Despite the increasing pressure to find solutions to the deepening mortgage crisis, Senate leaders had been locked in a procedural stalemate over how to take up the Democratic-authored bill.

“Every day Congress and the president do nothing is another day closer to another American family losing their home,” Reid had warned on the Senate floor.

The bill would, for the first time, allow bankruptcy judges to reset mortgages on primary residences. It would also provide $4 billion for local communities to buy and refurbish foreclosed properties; provide $200 million for counseling to help homeowners avoid foreclosure; give tax breaks for the homebuilding industry; and improve loan disclosure and transparency.

Republicans threatened to block the bill, as they did before the recess, unless Democrats gave in to their demands to allow votes on certain GOP amendments.

Most Republicans back a proposal by Republican Sens. Kit Bond of Missouri and Johnny Isakson of Georgia. Its key feature is a $15,000 tax credit for people who buy and occupy a home that is in or near foreclosure.

The bill shares other aspects of the Democratic proposal — but not the controversial bankruptcy provision, which Republicans vehemently oppose. They argue it will force banks to increase mortgage rates across the board.

Democrats “propose an ill-conceived plan that will substantially increase monthly mortgage payments on everyone who buys a new home or refinances,” Republican Leader Mitch McConnell said. “There is no way this proposal is going to fly. If Democrats want to help homeowners, they need to work with Republicans on proposals that will draw substantial bipartisan support.”

But Democrats complained Monday that Republicans also want votes on amendments related to nonhousing issues, such as extending President Bush’s 2001 and 2003 tax cuts. A GOP leadership aide doubted such amendments would be offered by his party.

A Democratic leadership aide predicted political pressure during the break might pry loose enough Republican votes to get over the 60-vote hurdle needed Tuesday to begin the debate.

The aide pointed to Republican Sen. Mel Martinez of Florida, who told CNN he “would hope” Republicans and Democrats would “come together with a package of solutions that are realistic about those things which can be done.”

Martinez, a former secretary of housing and urban development, is frustrated by the lack of action and wants to find a way to move the bill, an aide said.

Even Republican Leader McConnell said Congress must act to prevent the crisis from worsening: “I think it’s safe to say there is interest on both sides in moving forward,” he told Reid on the

The residential real estate market continues to deteriorate in 2008, with 20 key markets reporting steep drops.

Subscribe to Real Estatefeed://rss.cnn.com/rss/money_realestate.rss Paste this link into your favorite RSS desktop readerSee all CNNMoney.com RSS FEEDS (close) By Ben Rooney, CNNMoney.com staff writerLast Updated: March 25, 2008: 1:11 PM EDT 

 by John RaoNational Consumer Law Center, Inc.jrao@nclc.org

www.consumerlaw.org

  1.         What is the status of the bills? 

            Several bills currently pending in Congress would repeal the Bankruptcy Code provision which prohibits modification of home secured loans.  While the Bankruptcy Code generally permits secured claims to be modified, section 1322(b)(2) singles out mortgage claims and shields them from modification, other than through a plan which cures a mortgage default.  This provision prevents consumers from changing the interest rate, amortization, or term of mortgage loans in a chapter 13 plan.  The decision in Nobleman v. American Savings Bank, 508 U.S. 324 (1993) also makes clear that mortgage claims are not subject to stripdown to the value of the collateral.

            The following bills[1] would permit stripdown and loan term modifications on home mortgages: 

• The House bill is H.R. 3609 (‘‘Emergency Home Ownership and Mortgage Equity Protection Act of 2007’’).  Following two subcommittee hearings, H.R. 3609 (as amended by substitute bill) was voted favorably out of the Judiciary Committee on December 12, 2007 on a 17-15 vote.  A floor vote by the House is expected in early 2008.

• The Senate bill is S. 2136 (‘‘Helping Families Save Their Homes in Bankruptcy Act of 2007’’).  S. 2136 has been referred to the Judiciary Committee, which held a hearing on the bill on December 5, 2007.  It has now been included as Title IV in a separate larger stimulus bill, S. 2636 (“Foreclosure Prevention Act of 2008”).  This bill as amended has been introduced as a substitute for H.R. 3221, also included as Title IV, and may proceed to a Senate Floor vote in April, 2008.  (Any references to S. 2636 in this article will be to the amended substitute version). 

 2.         What is the most significant feature of the bills which would make stripdown for mortgages different than under current law for other loans? 

            Normally, a secured claim which is subject to stripdown under Code section 1325 must be paid in full within the three to five year duration of the plan.  While this may work for claims secured by personal property, few debtors are able to pay a mortgage claim of $100-500,000, or more, during the plan.  The bills provide a solution which is borrowed from chapter 12 farmer cases.  Similar to Code § 1222(b)(5), the bills allow payment of the modified mortgage, regardless of the original amortization, over a period beyond the life of the chapter 13 plan.  By eliminating the need to make additional payments on prepetition arrearages as under a cure plan, and by combining the term extension with interest rate and principal reduction, many debtors facing a home foreclosure would be able to propose feasible and affordable plans if this change is enacted.  (The last question below provides a comparison between a cure plan under current law and a modification under the bills).    

            The period of time over which the mortgage debt can be reamortized varies slightly under the bills.  S. 2136 provides in Sec. 101(a) that the mortgage term can be extended for a period up to 30 years after the case is filed, reduced by the period the loan has been outstanding.  Thus, a chapter 13 case filed shortly after the first rate reset on a 2/28 mortgage (at the end of the loan’s second year) could provide for payment of the mortgage claim as modified over a 28-year term.  The House bill, in Sec. 4 of H.R. 3609, and the Senate stimulus bill, in Sec. 412 of S.2636, use this same timeframe but would also allow repayment over the remaining term of the loan if that period is longer, such as might occur with a 40-year mortgage. 

  3.         Can the debtor freeze or reduce the interest rate on the loan?              The bills explicitly provide that the plan may modify the interest rate due under the mortgage, providing for payment of the mortgage claim at a “fixed annual percentage rate.”  Significantly, this would permit the debtor to stop adjustments on an exploding adjustable rate mortgage (ARM), convert an ARM into a fixed rate loan, and reduce the rate on a high-cost subprime loan.                  In Till v. SCS Credit Corp., 541 U.S. 465, 479 (2004), the Supreme Court held that in modifying the interest rate on a car claim being paid under a chapter 13 plan, the bankruptcy court should use the prime rate, adjusted to reflect potential risk, taking into account “such factors as the circumstances of the estate, the nature of the security, and the duration and feasibility of the reorganization plan.”   

            The bills contain almost identical language on determining the appropriate interest rate.  Sec. 101(a) of S. 2136, Sec. 412 of S.2636, and Sec. 4 of H.R. 3609 state that the plan may provide for payment of interest on the mortgage claim at an annual percentage rate based on the Federal Reserve Board’s annual yield for conventional mortgages, plus a reasonable premium for risk.  Although the interest rate starting point for mortgages would therefore be different than for other secured claims, using a conventional mortgage rate rather a prime rate,[2] courts can be expected to apply the Till factors in setting the risk premium.    

  4.         How will the amount of stripdown be determined?  

            Neither bill provides any specific additional guidance or limitations on how courts would determine the amount of permitted stripdown.  Thus, a mortgage creditor’s allowed secured claim will be determined in the customary manner by applying Code § 506.  Since the debtor in such cases will be proposing to retain the home, valuation generally will be based on the home’s fair market value (rather than its liquidation value) as of the effective date of the plan.

  5.         Are all mortgages covered by the bills? 

            The original Senate bill, S. 2136, would apply to all claims secured by the debtor’s principal residence.  The House and Senate stimulus bills would apply to “nontraditional” and “subprime” mortgages.  Sec. 2 of H.R. 3609 and Sec. 411 of S.2636, add definitions for these terms to Code § 101:

·        A “nontraditional” mortgage is defined to include interest-only and negative amortization loans, including payment-option ARMs. The definition excludes reverse mortgages and home equity lines of credit which are in a subordinate position.  The Senate stimulus bill, in Sec. 412 of S.2636, excludes from coverage an interest-only mortgage if the creditor can prove that it determined in good faith when the loan was made, after a full underwriting process and based on verified information, that the debtor had a reasonable ability to repay at the full interest and principal payment amount (assuming a 30-year fully amortizing loan), and the debtor’s payments under the loan would meet the debt-to-income ratio permitted under HUD guidelines.[3]

·        A “subprime” mortgage is defined as having an annual percentage rate which is greater than the sum of a Treasury security having a comparable maturity plus 3 percent on a first mortgage, and plus 5 percent on a subordinate mortgage.[4]  The applicable Treasury rate would be for the time period as of the 15^th day of the month preceding the loan application date.  For example, on a 30-year mortgage made in 2006 with an application date of April 4, 2006, a “subprime” mortgage covered by H.R. 3609 would have an interest rate greater than 7.72% (Treasury rate of 4.72% plus 3%) on a first mortgage and 9.92% (Treasury rate of 4.72% plus 5%) on a subordinate mortgage.[5] 

            The House and the Senate stimulus bills provide that the subject mortgage loans must have been made during a specified period. Sec. 4 of H.R. 3609 provides that the loan must be incurred during the period from January 1, 2000 until the effective date of the bill.  Sec. 412 of S.2636 states that the loan must be incurred before the effective date of the bill.

            Finally, Sec. 4 of H.R. 3609 provides that the mortgage must be the “subject of a notice that a foreclosure may be commenced.”

  6.         Are all debtors eligible to seek a modification? 

            Under the bills, the debtor may seek to modify a mortgage only if a plan to cure the default is not possible based on income and expense considerations used in the means test under BAPCPA.  Sec. 101(a) of S. 2136, Sec. 412 of S.2636, and Sec. 4 of H.R. 3609 provide that modification would be permitted if, after deducting from the debtor’s current monthly income[6] the means test expenses allowed under section 1325(b)(3)[7] other than payments on the mortgage claim, the debtor does not have sufficient income to cure the mortgage default and maintain the ongoing payments during the plan.  Many low- and moderate-income debtors who have defaulted on loans with abusive terms even before adjustable rates have reset should have little difficulty satisfying this test. 

   7.         Are there any specific plan confirmation requirements?  

            Sec. 6 of H.R. 3609 provides that if the plan proposes to modify a home secured loan, the modification must be proposed in good faith.  This section of H.R. 3609 also provides that a mortgage creditor shall retain its lien until the later of: 1) payment of the claim as modified, or 2) discharge under Code section 1328.

 8.         Do the bills address problems with excessive and undisclosed creditor fees in chapter 13 cases? 

            An enormous problem for many debtors who attempt to save homes from foreclosure in chapter 13 is that mortgage creditors often misapply payments and add unauthorized or excessive fees to the mortgage accounts while the case is pending.  These debtors emerge from bankruptcy after three to five years of struggling to cure an arrearage only to have the creditor begin foreclosure anew based on claims of unpaid fees for such items as attorney’s fees, property inspections, broker price opinions, and other charges allegedly incurred during the case.  These fees and charges are added to mortgage accounts without notice to the borrower, trustee or bankruptcy court.  

            All three bills include a provision to remedy this problem.  Sec. 201 of S. 2136, Sec. 421 of S.2636, and Sec. 5 of H.R. 3609 provide that fees and charges incurred during the pendency of a chapter 13 case may be charged to the debtor or added to the account only if:

·        the mortgage creditor discloses the fee or charge in a notice filed with the court within 1 year after the fee or charge is incurred, or 60 days before the case closing; and

·        the fee or charge is lawful under applicable nonbankruptcy law, reasonable, and provided for in the agreement.

            The bills specify that the failure of the mortgage creditor to provide the required notice would amount to a waiver of the subject fee or charge and that any attempt to collect the fee or charge would be a violation of the automatic stay or the discharge injunction.

            The bills also include provisions in these sections which state that a plan may provide for the waiver of any prepayment penalty on a mortgage claim.

  9.         Do the bills repeal any of the changes made by the 2005 Act? 

            None of the BAPCPA changes are repealed.  The bills do, however, address the requirement of a prebankruptcy credit counseling briefing added by BAPCPA, which has caused problems for some borrowers facing foreclosure.  Sec. 3 of  H.R. 3609 states that the debtor may obtain the briefing within 30 days after the case is filed if the debtor certifies that he or she has received a notice from the mortgage creditor that a “foreclosure may be commenced.”  This provision would effectively overrule court decisions which have held that a pending foreclosure is not a sufficient “exigent circumstance” which would merit a deferral of the counseling under the procedure Congress adopted in the 2005 law presumably to deal with emergencies such as foreclosures. 

            Sec. 102 of S. 2136 and Sec. 413 of S.2636 provide that the prepetition counseling requirement would not apply to a debtor who certifies that a foreclosure sale “has been scheduled.”

  10.       Are there any tax consequences for debtors resulting from a mortgage modification?  

            To the extent that the modification provided in the debtor’s plan includes a stripdown, the mortgage claim is bifurcated and the unsecured portion of the creditor’s claim would be discharged upon successful completion of the plan.  The debtor’s plan would also provide for continuing payments on the reamortized mortgage after the case is closed.  Sec. 7 of H.R. 3609 clarifies through an amendment to Code section 1328 that the remaining balance owed (as reduced by the stripdown) on the reamortized mortgage at the conclusion of the case is not discharged.

            Importantly, the amount of the mortgage stripdown, like all other debt discharged in bankruptcy, is not treated as discharge of indebtedness income for tax purposes.[8]  Given the limitations of the recently enacted Mortgage Forgiveness Debt Relief Act of 2007 (Pub. L. No. 110-142) in regard to home equity debt,[9] a mortgage modification in bankruptcy under these bills would avoid tax consequences for the debtor which might exist if the modification were made outside of bankruptcy.

 11.       Do the bills address any other issues?  

            The Senate bill contains several additional provisions which would:

·        limit application of judicial estoppel doctrine by permitting trustees or debtors to pursue unscheduled legal claims in certain circumstances (Section 202 of S. 2136 and Sec. 422 of S.2636);

·        confirm that bankruptcy judges can rule on core proceedings rather than refer the matter to arbitration (Section 203 of S. 2136 and Sec. 423 of S.2636);

·        set a higher homestead floor for homeowners over the age of 55, which would help older homeowners who are fighting to keep their homes as they go through bankruptcy but live in states with low homestead exemptions (Section 204 of S. 2136 and Sec. 424 of S.2636);

·        reinforce that consumer protection claims may be asserted in the claim allowance process in bankruptcy (Section 205 of S. 2136 and Sec. 425 of S.2636).

  12.       Do the bills make permanent changes to the Bankruptcy Code? 

            H.R. 3609 includes a sunset provision for two of the Code amendments; the changes permitting mortgage modifications and delay of counseling would apply only to chapter 13 cases filed within the 7-year period following enactment.  All other provisions in H.R. 3609, including those dealing with creditor fee abuses, do not sunset and would be permanent changes to the Code.  The Senate bills do not include a sunset provision. 

  12.       Can you provide a comparison between a cure plan under current law and a mortgage modification under the proposed bills? 

            Assume that the borrowers have a subprime 2/28 ARM mortgage with an initial teaser interest rate of 8.63%.  Their monthly principal and interest payment is $1,748 ($1,973 with taxes & ins.) for the first 24 months.  The borrowers are unable to afford even the teaser rate payment and fall behind.  They file chapter 13 bankruptcy in the eighteenth month to stop a foreclosure sale.  The principal owing at the time of filing is $225,000, with a total arrearage of $14,000, and their home is now valued at $200,000. To cure the arrears and maintain current payments with rate adjustments, they would need to make the following payments, assuming rate adjustments based on a LIBOR index plus a margin of 6, with applicable rate caps and using historical rates for the period 2004-2007.  This also assumes that taxes and insurance remain constant during the plan.

 Chapter 13 Plan to Cure Default on ARM under Current Law:

$   389    payment on arrears (assuming cure over 36 mos.)

$     46    interest on arrears payment each month (assuming required by mortgage documents)

$     44    trustee’s fee each month (assuming plan permits regular payments to be made directly to servicer and not considering administrative costs, such as attorney’s fees, or other payments under plan)

$ 2,227   monthly to keep current and cure arrears for first six months of plan (including taxes and insurance)

$ 2,364   monthly to keep current and cure arrears for months 7-12 of plan

$ 2,522   monthly to keep current and cure arrears for months 13 - 18 of plan

$ 2,651   monthly to keep current and cure arrears for months 19 - 24 of plan

$ 2,656   monthly to keep current and cure arrears for months 25 - 30 of plan

$ 2,664   monthly to keep current and cure arrears for months 31 - 36 of plan

            If the Code changes made by the bills were enacted, the borrowers could propose to 1) extend the mortgage term, so that it would have another 342 months to run (360 original term less 18 months loan has been outstanding), 2) reduce the interest rate going forward at a fixed rate of 7.25%, and 3) reduce the current loan balance to $200,000 based on the fair market value of the property.

Proposed Chapter 13 Plan with Mortgage Modification:

   $200,000      current loan balance

            342      month term

            7.25%  interest

$  1,643            ongoing monthly mortgage payment (including taxes and insurance of $225/month)

$       66           trustee’s fee each month (assuming mortgage payments are made by the trustee under the plan and based on a reduced commission of 4%)

$   1,709          monthly to keep current for 3 year duration of plan

$   1,643          monthly to keep current for remaining 25 1/2 years of mortgage term (subject to adjustment only for taxes and insurance)

[1] Copies of the bills are available on NCLC’s website, at: http://www.nclc.org/issues/bankruptcy/index.shtml.

[2] It has generally varied over time as to which of these two indexes have been lower.  For example, the annual contract interest rate for conventional fixed-rate first mortgages in 2007 was 6.34%, while the annual prime rate for that year was 8.05%.  In 2004, the annual conventional fixed-rate first mortgage rate was 5.84% and the annual prime rate was 4.34%.  See http://federalreserve.gov/releases/h15/data.htm.

[3] The debt-to-income guidelines are provided in the HUD handbook to implement 24 C.F.R. § 203.33.

[4] For adjustable rate mortgages with an initial teaser rate, the House bill provides that the annual percentage rate used shall be the greater of the introductory rate and the fully indexed rate.

[5] See http://federalreserve.gov/releases/h15/data.htm.

[6] See 11 U.S.C. § 101(10A).

[7] Section 1325(b)(3) references the expenses permitted under § 707(b)(2)(A) and (B).

[8] 26 U.S.C. § 108.

[9] See NCLC Reports, Bankruptcy and Foreclosures Edition, “How Congress Did (or Did Not) Save Your Clients from Foreclosure: The Mortgage Forgiveness Debt Relief Act of 2007” (Nov.-Dec. 2007).

Editorial from The Cleveland Plan Dealer March 9, 2008: Using bankruptcy code to help those facing foreclosure makes sense; urging banks to rework loans is insufficient Sunday, March 09, 2008U.S. economic trends are so bleak that central bankers are uttering phrases rarely used in their muted lexicons, including “fragile market conditions” and “substantial risks.”

They’ve got plenty of reasons to be glum.

February and January registered the worst back-to-back job losses in five years; foreclosures have climbed to record levels; and home values have fallen so far that - for the first time since the Federal Reserve began tracking this in 1945 - the debt Americans owe on their mortgages surpasses the equity they’ve built up in their homes.

Economists no longer speculate about the risk of recession, but about its length and depth.

Ben Bernanke, Federal Reserve chairman, has stepped up pressure on banks to rework mortgage terms for borrowers who can’t afford their loan payments and can’t refinance because of plunging home values.

It’s a reasonable enough premise, but too few lenders are heeding the call. Instead, they’re tightening credit standards across the board.

There’s no time to delay crafting a workable response, because foreclosures - which erode the equity of not only the families affected but that of their neighbors and their communities, too - are going to soar.

One approach would be to amend the bankruptcy code. A bill sponsored by Senate Majority Leader Harry Reid of Nevada would allow judges to modify mortgages on primary residences, which isn’t currently allowed.

Restructuring and reamortizing debt is the “heart and soul of the bankruptcy process,” J. Rich Leonard, a judge in the U.S. Bankruptcy Court for the Eastern District of North Carolina wrote recently. It’s done frequently with any debt - except that which is secured by the family home - including yachts and holiday homes.

“Bankruptcy courts are often the canaries in the mine shaft, noticing changes in the economy before they become readily apparent to others,”

the judge wrote. They see mortgages with extremely high interest rates and payments far bigger than what the debtor could afford under any reasonable underwriting standards, according to the judge.

Under the bill, judges would use a formula to set an interest rate and loan value for borrowers who met certain criteria. That would offer transparency and predictability.

This plan wouldn’t help everyone. In Ohio, fewer than half of the homeowners facing foreclosure file for bankruptcy, which mars credit reports and imposes tight financial limits for years.

Still, this approach could help keep 600,000 Americans in their homes.

That should be lenders’ goal because it also keeps payments coming in.

But without changes to the bankruptcy code, lenders have little incentive to rework loans.

Senate Democrats are trying to revive the proposed bankruptcy changes, blocked recently by Republicans. Lawmakers ought to see that, despite opposition by many lenders and the White House, this is not a political issue, but an economic one. Why stand in the way of a viable option to help thousands of homeowners who, otherwise, will tumble into foreclosure?

Banking lobbyists have stymied attempts to move a housing package in the Senate because of strong opposition to the bankruptcy provision that would allow a judge to adjust the principal of a loan, a provision referred to as a “cramdown.”

The White House has threatened to veto the bill and the rewriting of bankruptcy rules would undermine current mortgages. Cramdowns, or the ability of a judge to change the terms of a primary mortage that has entered into foreclosure works something like this: if a homeowner owed $300,000 on a house valued at $200,000, the judge could write off the $100,000 difference as secured debt the lender could not recover.

Even when compromise language to cap the cramdown was proposed, it failed to gain traction in the Senate. The modification would cover only existing subprime and adjustable-rate mortgages and would allow creditors to recoup lost mortgage principal after a modification if the borrower resells the home.

The Senate bill does contain language that makes it easier for seniors to get a homestead exemption of up to $75,000 as they go through bankruptcy, allowing them to save their house during a foreclosure proceeding.

The House Judiciary Committee approved similar bankruptcy language late last year, but the measure (H.R. 3609) has yet to advance to the floor. That bill won only a single Republican vote on the House panel, suggesting any effort to move the bill in the closely divided Senate could be difficult.

The White House continues to pitch its voluntary effort of persuading lenders to refashion mortgages with at-risk borrowers who are in foreclosure proceedings, contending it would be the most efficient and less costly avenue.

The collapse of the subprime lending market triggered the continuing slump in the overall housing market. About 1.8 million subprime borrowers who took out adjustable-rate loans that reset to higher levels after an introductory period are threatened with losing their homes to foreclosure.

Dear Housemember / Senator 

I am writing because I am deeply concerned about the epidemic of home
foreclosures that is devastating families, neighborhoods and our entire
economy. Voluntary actions by loan companies are not sufficient to
address the magnitude of the foreclosure problem, which is projected to
get even worse. Please prevent hundreds of thousands of foreclosures and
provide a vital boost to our economy by supporting the “Foreclosure
Prevention Act of 2008″ (S. 2636).It is hard to understand why current law allows mortgage lenders to go
to bankruptcy court when they get in trouble, but homeowners who are
struggling to keep their homes don’t have that option. A key part of S.
2636 would lift the ban that now prevents homeowners from getting
court-supervised loan modifications. This would not excuse anyone from
paying for their home, but would simply give judges the authority to
alter unaffordable loans to make payments manageable.Allowing loan modifications thro ugh the courts would impose no cost on
the U.S. Treasury, and it would strengthen the entire economy by helping
hundreds of thousands of homeowners avoid foreclosure–foreclosures that
hurt us all.

I understand that the Senate will vote on S. 2636 very soon. This is a
time to stand up for homeowners and support sustainable mortgages.
Please help restore confidence in our economy by giving your full
support to this bill.

Thank you for your consideration.

By Jeffrey H. Birnbaum
Washington Post Staff Writer
Friday, February 22, 2008; D01 The nation’s largest lending institutions are lobbying hard to block a
proposal in Congress that would give bankruptcy judges greater latitude
to rewrite mortgages held by financially strapped homeowners.The proposal, which could come to a vote in the Senate as early as next
week, is being pushed by Democratic congressional leaders and a large
coalition of groups that includes labor unions, consumer advocates,
civil rights organizations and AARP, the powerful senior citizens’
lobby.

The legislation would allow bankruptcy judges for the first time to
alter the terms of mortgages for primary residences. Under the proposal,
borrowers could declare bankruptcy, and a judge would be able to reduce
the amount they owe as part of resolving their debts.

Currently, bankruptcy judges cannot rewrite first mortgages for primary
homes. This restriction was adopted in the 1970s to encourage banks to
provide mortgages to new home buyers.

The Democrats and their allies see the plan as an antidote to the recent
mortgage crisis, especially among low-income borrowers with subprime
loans. The legislation would prevent as many as 600,000 homeowners from
being thrown into foreclosure, its advocates say.

“We should be giving families every reasonable tool to ensure they can
keep a roof over their heads,” said Sen. Richard J. Durbin (Ill.), the
Senate’s second-ranking Democrat and author of a leading version of the
legislation.

But the banks argue that any help the proposal might provide to troubled
homeowners in the short run would be offset by the higher costs that
borrowers would have to pay to get mortgages in the future. The reason,
banks say, is that they would pass along the added risk to borrowers in
the form of higher interest rates, larger down payments or increased
closing costs.

If banks were unable to pass on the entire cost, they could be forced to
trim their profits.

“This provision is incredibly counterproductive,” said Edward L.
Yingling, president of the America Bankers Association. “We will lobby
very, very strongly against it.”

The Durbin measure is part of a larger housing assistance bill being
pushed by Democrats in the Senate. A separate version of the measure was
approved late last year, mostly along party lines, by the House
Judiciary Committee. The Bush administration has said that it opposes
both provisions as overly coercive and potentially detrimental to the
already strained mortgage market.

Lobbyists for major banks have made the proposal’s defeat a top
priority. They have been meeting at least weekly to coordinate their
efforts and have fanned out on Capitol Hill to meet with lawmakers and
their staffs.

At least a dozen industry associations have banded together to fight the
proposed legislation. They include the American Bankers Association, the
Financial Services Roundtable, the Consumer Bankers Association and the
Mortgage Bankers Association. These groups and others have signed joint
letters to lawmakers on the issue.

In one of their letters, sent to Senate leaders last week, the groups
wrote that the legislation would “have a very negative impact in the
financial markets, which are struggling in part because of difficulties
in valuing the mortgages that underlay securities and would greatly
increase the uncertainty that already exists.”

Bank lobbyists have also gone online to make their case. The mortgage
bankers have set up a Web site,
http://www.mortgagebankers.org/StopTheCramDown, that can calculate how
much mortgage costs might increase by state and by county if the Durbin
measure were to become law. “Cram down” is the industry term for a
forced easing of mortgage terms.

Supporters of the measure are also sending letters and meeting with
lawmakers. A letter urging a quick vote on the proposal was delivered to
Senate Majority Leader Harry M. Reid (Nev.) last week. It was signed by
19 organizations, including the Consumer Federation of America, the
AFL-CIO, the National Council of La Raza, the U.S. Conference of Mayors
and AARP.

The letter said, “The court-supervised modification provision is a
commonsense solution that will help families save their homes without
any cost to the U.S. Treasury, while ensuring that lenders recover at
least what they would in a foreclosure.”

The Center for Responsible Lending, a pro-consumer watchdog group that
backs Durbin’s effort, is trying to instigate voter e-mails to lawmakers
on the subject. The group’s Web site includes a page that allows people
to send electronic notes supporting the measure to their elected
representatives with just a few clicks of a mouse.

AARP spokesman Jim Dau said his group will also ramp up its efforts. It
may soon ask its activists to urge lawmakers to back the
mortgage-redrafting legislation. AARP, which is the nation’s largest
lobby group, has a list of 1.5 million volunteers whom it says it can
call upon to contact lawmakers on legislative matters.

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