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Waiting for H.R. 1106 (a.k.a. H.R. 200/S. 61)

posted by Jason Kilborn

The comment thread from the previous post raises an important point that deserves treatment in its own post: what's the deal with the House version of the mortgage lien stripping bill (H.R. 1106), a vote on which has been postponed due to fears from pushback from "Blue Dog" and "new" Democrats.

First, my two cents: I believe (1) limiting application of this relief to property "that is the subject of a notice that a foreclosure may be commenced" is foolishly short-sighted and a significant restriction that has not gotten much press, but (2) relieving these folks of the idiocy of pre-filing credit counseling is to be roundly praised (perhaps we can be rid of this requirement for all filers in the not-too-distant future, as Sweden did in its 2007 reform of consumer bankruptcy law), (3) the balance of interests is impressive and eminently fair, allowing for reasonable modification of interest rates, extension of repayment term, and a reasonable strip-down of the secured claim, but also allowing for recapture of a declining portion of that loss if values rebound and the home is sold for a profit within 5 years. The big question will be valuation, and I fully expect the banks to push back hard on that question in any future case, probably irrationally, as I've complained elsewhere. As usual in bankruptcy discussions, people just don't get that this law doesn't create losses, it forces banks to acknowledge already existing losses, which is an important prerequisite to getting us out of this financial crisis. Banks' arguments that this law will reduce lending are subject to only two appropriate responses, in my view: if banks reduce lending in response to this law, that would indicate either (1) yet more irrational mismanagement by banks, which makes me feel like nationalization of the home mortgage industry is a more attractive option, along the lines of the full nationalization of the student lending industry in President Obama's budget proposal, or (2) a proper reevaluation of the risk of lending to uncreditworthy borrowers--forcing the banks to engage in the sort of responsible risk management that was needed all along. Heads we win, tails we win. The only losers here are irresponsible banks, who deserve to lose given their mismanagement, and they should no longer be allowed to externalize the negative consequences of their mistakes onto debtors, their families and communities, and society at large. Internalizing negative externalities from irrational creditor action is the primary reason why country after country in Europe adopted consumer bankruptcy systems in the 1980s and 1990s, as I'm writing in an article on the Danish system now.

Second, though I hope and expect this bill will pass next week, the "Blue Dog" Democrats appear to have fallen prey to the Jedi mind tricks of the lending industry lobbying juggernaut. This reminds me of a portion of the late 1980s Eddie Murphy Raw monologue, in which Eddie recounts an exchange with Mr. T. Eddie explains that he had been making fun of Mr. T in an earlier monologue and was accosted by Mr. T when Mr. T found out about this: "I heard you been saying @#$% about me," Mr. T accused. Eddie explains in Raw that, fearing reprisal from impressively scary Mr. T, he decided to use his "Jedi mind trick": he responded calmly, "It wasn't me." When Mr. T retorted that he had heard Eddie saying these things about him, Eddie simply repeated, "It wasn't me." Finally, Mr. T conceded, "Well, well . . . I guess it wasn't you. I pity the fool who's been telling me them lies!" The Bankers Association apparently saw Raw and has effectively applied Murphy's Jedi mind trick on the Blue Dog Democrats (no offense is intended to Mr. T through my comparison between him the weak-minded Blue Dogs).

Comments are wide open--what do you think about H.R. 1106?


The waiver of credit counseling when the debtor has received notice that there "might" be a foreclosure is a nice gesture, but as a practical matter, I suspect most debtors' counsel will simply have their clients take 30 min. and complete the credit counseling course rather than going through the trouble of drafting a "certification," attaching proof of the notice, and then risking a challenge that could result in the dismissal of the case.

I think the law is going to be weakened, as all the past 'foreclosure help' laws have been weakened, to the point where it won't help very many people.

I think political compromise, as opposed to experts drafting balanced and internally consistent provisions, is a bad way to make bankruptcy law.

I think the DEPTH of relief may be something that could be reduced, but what it looks like we are going to get is a reduction in the BREADTH of relief.

I think it is better to limit relief to say, a reduction in principal capped at 25%, rather than leaving out 90% of the people that need relief.

I think it is a mistake to craft complex tests for what is a subprime mortgage, and limit relief to that subsection of the foreclosure crisis.

I think that lending institutions that still hold their mortgage loans - that never sold them to the securitizers - should be protected, either by excluding them from mortgage modification, or better, by limiting the ability to reduce principal in those loans to something like 10%. This wasn't a problem caused by lenders who had, and continue to have, a full body's worth of skin in the game.

I think it is hard to draft a bankruptcy bill that isn't going to allow some people to get bankruptcy relief who wouldn't have defaulted on their mortgage absent the right to cram down a mortgage modification.

I think if the goal is drafting a law that won't let any undeserving homeowners get primary residence mortgage relief, the law isn't going to help more than 10% of homeowners who are going to lose their homes to foreclosure.

I think angioplasticians are going to be making huge, huge money fixing the noses of Mortgage Bankers Association spokespeople. The law doesn't apply to mortgages taken out after the effective date of the legislation. Passing the law is no more of a risk to new mortgages than having mortgage modification "in the air" and not passing the law. In both cases, the risk is simply that there will be a law passed in the future.

I think the fact that we currently have some of the lowest mortgage loan rates on record - as this mortgage modification law is being debated - makes the Mortgage Bankers Association look like lying liars.

I think that it is odd that anyone would continue to listen to a trade organization that cheered on every mortgage "innovation" made in the last 10 years, claiming these new loans were all for the greater public good.

I think that no one can full comprehend the human toll of 6,000 plus foreclosures a day.

I think I'll try to stop thinking about this, since I don't have the money to make sufficient campaign contributions to influence the process.

It is also potentially problematic as to the phrase, "attempted ... to contact the holder of such claim...."

What constitutes an "attempt" (e.g., the debtor calls the creditor, lets it ring 3 times, and hangs up; the debtor sends an e-mail or letter to an address from the creditor's web page; the debtor posts an ad in the public notices section of the newspaper)?

Who qualifies as a contact?

How will debtors prove that they attempted a contact -- affidavit, phone record, e-mail, certified letter, etc.?

Does this open the door for the mortgage creditor to challenge the debtor's proposed modification by asserting, "This debtor does not qualify under 1322(h)(1)(A) because I have no record of any contact from this debtor?"

Granted this is merely my own opinion but in defense of Mr. T and Jedis (ies?) everywhere, Professor, let's just call it what it is. Flat out, unabashed, fraudulent misrepresentation and/or just plain LYING. And if that doesn't sound catchy enough we could always go for "fraud upon Congress" although that may seem a tad oxymoronic. Also, in my own opinion, the lending industry lobbyists and Mortgage Bankers Association has been engaging in these tactics for decades with little or no resistance or rebuttal. Of course, I could be completely wrong here...

Just copied from a previous post:

Ok for real now. I just read it.

Not withstanding the switching of the “ands” and “ors”.. and such (I know, I know it makes a huge difference sometimes, I just don’t have my “mini-code” on me right now) but the first thing that popped out at me was:

One WE FINNALY GET TO PASS IT THROUGH THE 506 “gate”. Which to me means you get a % of the unsecured portion of the “Equitably Realigned Mortgage” note.

The second was that, we don’t know what kind of interest a BK judge will order. It just says, Prime Rate “plus a reasonable premium for risk”. That could create some un-uniformity throughout the various districts.

Three, (THE BIG ONE for me). Clawback! It seems really fair to me for some reason. You don’t complete the “Plan” you sell the home, you pay a “Clawback”. 80% the First year, 60% the second, and so on and so on. Not to exceed the original secured portion of the loan. (that could be huge! Huge!) I didn’t really read any clawback post-discharge, which I think, is fair.

Four, the “Excessive Fees” part. It is very similar if not identical to the practice we are already seeing. I think the difference is the one we have now is 60 days from “notice” and the proposed legislation has 1 year from the date the charge is incurred “OR” 60 days from notice.

Where am I? Oh ya, FIVE. Trustee fees, yada yada, great 4% by passing the MTG payment thru the Trustee. Great. Nice number.

Last but definitely not least SIX! OMG! (but pretty fair over all to me anyway) FHA! SEC 122(a)and on….. For me it was…….. “the Secretary may pay insurance benefits for the mortgage as follows”. “The Secretary may pay the insurance benefits for the mortgage, but only upon the assignment, transfer, and delivery to the Secretary of all rights, interest, claims, evidence, and records”. If I read and understand this right if you modify a FHA loan the “Secretary” will pay insurance benefits. (What MIP would have paid I could only assume) So “fees” including attorneys’ fees, BPS, Inspection fees etc AT ASSIGNMENT. I still think that would leave room for servicing companies to… ahhhheeem…. Inflate some fees… Not saying that they would, only that it’s possible. WHAT MORE INCENTIVE DO YOU NEED?

Oh ya, I did E mail my opinions to "Blue Dog" BTW. I told Mrs. "T something" that debtors do not have a multimillion dollar lobby! (done at 1 am mind you) I also told her that if I were debtors losing their homes in her state (CA I think) I would be depressed to know that a "Poor,Meek and Humble" Citizen like me (wink wink), making less than a third of what a lobbyist makes was going to bat for them. If I won the lotto, I would love to contribute to their reelection. Alas I cannot complain, as my own Senators TX(republicans) suck! One more than the other. (With all due respect).

Just like we have that Reagan era crap that regulation = Socialism or Communism, I am starting to tell people that Deregulation = Slavery (for poor and middle class people anyway!) It's not true in a sense but that didn't stop the "Immoral Majority" of the 80s. It doesn't seem like truth is drowning out all the LIES! Especially when they do it with a straight face! Man their good! Hollywood is their calling.

RANT OVER.... for now....

The proposed "certification" language in section 101(2) requiring the debtor "submits to the court a certification that the debtor has received notice that the holder of a claim secured by the debtor's principal residence may commence a foreclosure" is almost idential to language contained in most DOT's and Notes. In many instances, a monthly bill from the servicer contains this language.

So, strictly constructed the proposed chanages to 11 USC 109(h)(5) would not appear to restict any access to 506(a) modification. Any thoughts?

I have never called anyone in congress before, but
after watching the debate on H.R. 1106. I left
a message for Rep. foxx. This woman is being
paid by a lobbyist, and she needs to site down.
1106 IS ONLY FAIR. Only the desperate will file,
it ruins your credit for years to file bankrupcy.
I will never vote for a republican again after
watching the disgusting way they have acted.
I'm posting and calling for support.

I'm with you Kathy! I did the same thing! Good for you. We need more of you. I know of a very prominent local Bankruptcy Attorney who has always (since she has been able to vote) been a Republican supporter. This year she was so disgusted with them that she voted by party (Democratic) instead of voting individually. This is a woman who represents major companies on the creditor side of BK and Corporate 11 debtors.

I just have a (tiny) disagreement from my side on the effects of Bankruptcy. I have been able to contact more and more discharged debtors recently and I have not been seeing the devastation on credit you speak of. In fact before Debtors’ 7s are discharged or mid-way through their 13s they receive a constant flow of credit offers. I have actually seen an increase in credit scores 12 months post-discharge. Some debtors who have had a Bankruptcy discharge in the past and need bankruptcy again (for whatever reason, mostly medical) have seen as much if not more credit offered to them post-discharge. I always ask them of their experience post-discharge and the responses are overwhelmingly positive.

Everyone seems to think that the big issue will be appraisals. As a practicing BK lawyer, I'm FAR more concerned about the applicable interest rate. The phrase "reasonable premium for risk" is a litigation magnet, and will take up an absurd amount of judicial resources to determine on a case-by-case basis. In my opinion, the risk premium should be fixed as a stated add-on to the national average rate. Then, everyone knows what they're dealing with, and we don't have to hire experts to battle out the numbers.

I agree that the term should be defined (with a percentage range and a list of factors, at the every least) in the statute - but if it isn't, I think the bankruptcy judges will graft on In re Till's 'up to 3%' approach. With a few exceptions quibbling about how to interpret the 4-4-1 split, Till is the law of the land at the time the mortgage modification bill is being cobbled together.... Sorry, I mean, drafted.

The courts will, I think, interpret the intent of Congress to be for judges to use Till as a template. With interest rates so low, most debtors attorneys just use the maximum Till figure to avoid litigation, or stipulate to it immediately if the creditor objects to the lower figure in the Chapter 13 plan. The interest rate is rarely actually litigated.

Of course, with motor vehicles, the loans are shorter and the interest rates are being reduced from over 20% to the 7% range. So, it might be more of an issue with the mortgage interest rates. There is more money to fight over in a mortgage that is both longer than a car note and usually involves much higher underlying debt. I can see the argument that there would be more litigation about the proper interest rate. But that will happen regardless, unless Congress makes the test completely mechanical - as in "calculated on the date of filing, based this readily available on-the-internet defined base rate, plus 2%".

I would be surprised if the new law included that kind of specific mechanical provision. That could result in unfairness to mortgage holders, and we all know that inequitable mechanical tests are strictly limited in their application - to debtors, only.

I was thinking “Till” also but I didn’t know how much sense that would make because it was a “vehicle” decision.

Talked to the "other" side Friday and when presented with the question of valuation he had some of the same feelings as I on the appraisal Litigation. Settling into a groove that is. As a semi-case in point, we had an Adversary scheduled…. well right now, but we worked out an agreement on Friday. What he said was something that I didn’t expect. He (basically) said that so long as there was a “warm” body willing and able to pay on the Mortgage that his client would not fight the reinstatement of the already foreclosed home. Thus allowing the debtor to cure in a Ch. 13 Bankruptcy.

"Heads we win, tails we win" is a very naive statement about a government policy. There are more than two outcomes possible when a new rule is introduced into a complex economy. It's puzzling how you can be so concerned about externalities of private transactions but ignore externalities of governmental actions.

I don't think any one who works in finance has any trouble understanding this problem. Political risk of one's own government is a fatal barrier to investment because it can't be predicted rationally and thus can't be priced or hedged. For a leveraged institution like a bank, the margin of error is thin to begin with and that kind of risk is not something its capital base can bear. You can see the consequence of political risk in the equity markets. The surge of confidence that many of us hoped for upon the new President (whom I voted for) taking office has been replaced among investors by confusion and concern, leading to disinvestment. The same is happening with respect to mortgage lending. A year ago, you could find investors willng to invest equity in a mortgage business, but not today, even though we should be closer to the bottom than back then. No one knows what risk premium should be attached to the business because no one knows how much of a value transfer there will be to borrowers. Not making investments is a rational response given such massive uncertainty. It's what happened in FDR's second term, prolonging the Depression. It is a perfect example of why "heads we win, tails we win" doesn't happen in the real world.

Political risk in an industry does often lead to its nationalization as you've recognized. However, the size of the mortgage industry dwarfs the student loan industry. Such a nationalization would require the government to raise even more trillions of permanent debt. I can't believe you've analyzed that as well. I doubt it turns out to be a "heads we win, tails we win" proposition.

I read the responses from Republicans on H.R. 1106 and here are the main ones.
1. 96% of people are paying on time and should subsidize the 4% who are not.
Are you really an elected official? Do you think that all laws and bills are passed to serve everyone? Laws are passed everyday to protect the minority. Should we stop passing laws to help the handicapped and disabled because 99% of us aren't. You're ignorance amazes me. Nobody is "subsidizing" anyone. Cramdowns only make the banks face the music and realize the real value of the assets. Exactly what TARP was supposed to do until Bernake and Bush slipped it all to the banks.
2. This will raise interest rates for everyone.
Where are you getting this info? Oh, wait from the American Bankers Association of course. We've already done the homework guys, this statement is bullcrap, completely unfounded, unproven and totally opposite of historical data.
3. It will violate the sanctity of contract and cause complete Bankruptcy Helter Skelter and put us back into the Wild Wild West.
Actually dummy, the primary residence clause is the only contract that CAN'T be violated in bankruptcy already. That, thanks to your elected republican officials, was added to protect their Wallstreet buddies and eliminate the largest single portion of DEBT a regular Joe has. Isn't bankruptcy's primary reason to allow them to restructure and eventually get out of debt? How can you do that without touching the largest debt they have? Oh, I might add that a wealthy person (perhaps an elected official or wallstreet banker) CAN have the mortgage on their second, vacation home or million dollar yacht cramdowned and adjusted under current bankruptcy law. Hmm, how'd that happen?

4. This will help irresponsible people who bought more house than they could afford.
The majority of people that would be helped are people that bought an interest rate they couldn't afford. Remember the banks that we gave billions to? Yeah I'm sure you remember, those same banks are still charging people (taxpayers, the ones who provided the money) 9, 10, 12% interest on a mortgage! Try paying that one. If you bought more house than you could afford, then this won't help you anyway. You still have to be able to afford the payment. Now I can't be sure someone won't figure out a way to get one over on Uncle Sam, but it's irresponsible and irrational to stop from helping millions because a few may get over. Should we drop Medicare too?

In closing, WAKE UP AMERICA! The dems are trying to do you a favor and equalized the bankruptcy code. They wan't you to have the same favors and benefits as the wealthy. Quit crying about how so and so might get a better deal than me, wah, wah. You want to file bankruptcy then go ahead. I don't recommend it regardless of the benefit. It's a long and painful process. And for all you that tout that you buckled down and paid your bills, have 6 jobs etc. etc. your probably like the majority of the nation and are only 1 unfortunate accident away from bankruptcy. 1 car wreck, 1 lost job, 1 heart attack, there are many things can put us asunder. So remember that when you cry "No, don't help the unfortunate" for you may get what you wished for.
Oh and if you want to read the comments yourself they are here "http://www.govtrack.us/congress/bill.xpd?bill=h111-1106&tab=speeches".

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