110th CONGRESS, LEGISLATIVE ISSUES A - Z

ISSUE: Congress has taken in keen interest in the housing market given the recent downturn in the industry. Home prices have fallen by 5% in many markets and are expected to eventually fall by at least 10%. Without legislative or industry action, as many as three million American mortgages loans are expected to default in the next two years. Two-thirds of these loans are expected to end up in foreclosure.

The reason given by many for these disturbing predictions is that subprime loans (those made to borrowers with less than stellar credit histories) were predatory because of the terms of the loan and the lack of transparency in disclosure documents. Characteristics that are typically described as predatory are, 1) very low interest rates for two or three years, subject to resets at the end of the fixed period to much higher variable rates, with the borrower only qualified at the initial, temporary low rate; and 2) excessively high fees and prepayment penalties. Were home prices not stagnating or falling in most markets, as well as interest rates not creeping higher, many of these problematic loans could have avoided foreclosure simply through refinancing.

The House and Senate Judiciary Committees have examined legislation that would grant bankruptcy judges the power to rewrite the terms of loans (a practice called “cramdowns”) made on primary residences that are in the foreclosure process. Usually these residences were bought with subprime mortgages, usually adjustable rate mortgages (ARMs). With interest rates higher than several years ago, many of these mortgages are facing interest rate resets from the initial lower rates to ones reflecting current or higher lending rates. Many homeowners with these mortgages are facing mortgage payments that they cannot afford. Primary residential mortgages are treated differently under Chapter 13 bankruptcy proceedings as compared to other types of secured debts, such as vacation homes and auto loans. Hence, the Congress and the Bush Administration have stepped in with proposals to alleviate the situation and prevent mass foreclosures, a scenario that would lead to high vacant residential property inventories, mortgage industry financial losses, depressed home values, and instability in the secondary mortgage market.

CUNA POSITION: CUNA agrees that this crisis must be addressed and applaud well meaning efforts by the Congress to remedy the problem. Credit unions, by and large, don’t have lending portfolios heavy with subprime ARM mortgages. This is because credit unions are generally conservative in their lending practices and also because credit unions exist to serve the best interest of their members. This prevents credit unions from selling mortgages that they know a borrower will have difficulty repaying every month. In fact, House Financial Services Committee Chairman Barney Frank (D-MA) has repeated stated that this mortgage lending crisis likely would not have happened if other sectors of the mortgage industry had been regulated like banks and credit unions.

However, CUNA is concerned about the unintended consequences of pending legislation that would open the federal bankruptcy code and allow for loan term modifications for homes in bankruptcy. Allowing bankruptcy judges to change mortgage interest rates and maturity dates would have an adverse reaction on existing loan portfolios held by financial institutions. In addition, the value and safety of existing mortgage-backed securities would be called into question. These investments are second only to U.S. Government securities in their public perception as being safe and sound investments. The value of mortgage-backed securities comes from the fact that they are backed by physical structures that can be sold should a borrower default. Therefore, if investors start to question the value and safety of investing in these products, it is likely that liquidity in the secondary mortgage market will decrease and financial institutions will be unable to offer the same volume of loans as before. In addition, if judges are allowed to modify mortgage terms, lending institutions will be forced to factor in these potential cost factors into all mortgage products. Many analysts predict that lenders will have to increase rates anywhere from 50 to 200 basis points to accommodate the increased risk and uncertainty.

CUNA delivered three letters to the members of the House and Senate Judiciary Committees, expressing our concerns with mortgage bankruptcy legislation pending in both committees. The letters can be accessed at the bottom of this page. In the first two letters, CUNA made five recommendations to limit the scope of pending legislation in order to help those most in need and also to limit the potential negative consequences of these legislative proposals on the solvency and stability of lending institutions. CUNA lobbyists have met with Senators, Members of Congress, and their staffs to present our proposals and express our willingness to achieve a compromise mutually acceptable to both parties.

Specifically, CUNA offered a compromise in which elimination of the current exemption for first mortgages from modification during Chapter 13 bankruptcy proceedings would only be permitted if such legislation included the following limitations:

• Permits bankruptcy judges to lower the principal amount of a loan, no less than the value of the house at the time the mortgage was made.
• Permits bankruptcy judges to lower interest rates on mortgages, no less than current market rates for standard mortgage loans.
• Permits bankruptcy judges to extend the remaining term of a loan secured by a borrower’s primary residence by up to five years, but to no more than 40 years.
• Permits the cancellation of prepayment penalties.
• Extends the authority for bankruptcy judges to modify the terms on loans secured by a borrower’s primary residence only to loans made between January 1, 2003 and the date of enactment of the bill.

This approach not only limits “cramdowns” to amounts that result from: (a) high fees that were financed into the mortgage, (b) negative amortization, and (c) greater than 100% loan-to-value lending; but it would also set a timeframe that targets the solution to the specific problem. Without this time limitation, there could be significant increases in the cost of mortgage credit in the future for those with less than perfect credit. This time limitation would also reduce substantially any impact the law might have on the secondary market’s willingness to buy mortgage-backed securities in the future.

The third CUNA letter was written in response to a modified bill that eventually passed the House Judiciary Committee on December 12, 2007. The substitute bill was much narrower in scope than the original but CUNA still expressed concerns with a provision that defined prime-rate interest-only loans as subject to the cramdown provisions.

STATUS/OUTLOOK: The House Judiciary Committee was the first panel in Congress to act on pending mortgage bankruptcy legislation. On October 4, 2007, the House Judiciary Subcommittee on Commercial and Administrative Law passed H.R. 3609, the Emergency Home Ownership and Mortgage Equity Protection Act Act by a vote of 5 to 4. Sponsored by Rep. Brad Miller (D-NC), the bill amends the United States Code with respect to modification of certain mortgages on principal residences. Passed on a strictly partisan vote, the Committee leadership then decided that a bipartisan compromise was necessary for the bill to be enacted into law. Judiciary Republicans, led by Rep. Steve Chabot (R-OH), sought to cap the level of homeowners who could seek such relief to those at 150 percent of their county’s median income level. Chabot also sought a 7 year sunset of the legislation. Democrats from high housing cost states complained that the legislation would limit the assistance available to their constituents. As a result, the compromise effort was abandoned and the bill proceeded to a full committee markup that began on November 7, 2007. After a long series of House floor votes, the markup was postponed and eventually rescheduled for December 12, 2007.

On December 12th, House Judiciary Chairman John Conyers (D-MI) and committee member Rep. Steve Chabot (R-OH) presented legislation more limited in scope than the original mortgage bankruptcy bill. The bill was considered by the committee and passed unamended by a vote of 17 to 15. Chabot was the only Republican on the panel to vote in favor.

This modified bill would allow cramdowns for homeowners with subprime or “nontraditional” mortgages already in the foreclosure process or at least 60 days in arrears. The legislation would limit the cramdown provisions to mortgage loan originated between January 1, 2000, and the date of the bill's enactment into law. In addition, the bill would sunset in seven years. Also, the mortgage repayment period would be extended up to 30 years and a bankruptcy judge would have the authority to reduce the mortgage principal to the home’s current market value, a provision designed to help those homeowners in areas where home prices have fallen dramatically. These provisions would apply to homeowners who are in Chapter 13 bankruptcy and have passed a strict means test.

Representatives Brad Sherman and Adam Schiff, both California Democrats, defended interest-only (IO) loans during committee consideration of the bill. Sherman stated that IO mortgage loans were legitimate and beneficial to many home buyers. He stated that he wished to work with the Chairman to modify the bill to exempt prime rate IO mortgages from the bill before it reaches the House floor for a vote, expected sometime in the spring.

CUNA supports exempting prime IOs as many credit unions have carefully underwritten such mortgages. In fact, 108 credit unions have non-traditional mortgages that account for at least 10% of their first mortgage loans. And, 460 credit unions have some "non-traditional" mortgages.

CUNA does not support the legislation in its current form, but has received a commitment to work with the Committee on our concerns between now and when the legislation is expected to receive a House vote.

On December 5, 2007, the Senate Judiciary Committee held a hearing on pending legislation to allow mortgage restructurings under the bankruptcy code to help home owners at risk of foreclosure. Senator Richard Durbin (D-IL) chaired the hearing and promoted legislation he introduced to allow cramdowns. The bill, the Helping Families Save Their Homes in Bankruptcy ActAct (S. 2136), would allow bankruptcy court judges to reduce the remaining values, interest rates, and maturities of existing mortgages. Specifically, the bill allows cramdowns for principal residential mortgages for homeowners in Chapter 13 bankruptcy. During proceedings, judges would have the discretion to fix the APR over a 30-year period. The bill also exempts the debtor from the requirement for credit counseling if the court receives certification that the home has been scheduled for a foreclosure sale. In addition, any prepayment penalties can be waived. Another provision in the bill prohibits a bankruptcy judge from allowing a claim that is subject to any remedy for damages or rescission due to failure to comply with the Truth in Lending Act or any other state or federal consumer protection law.

Senator Arlen Specter (R-PA) has introduced a competing bill that would only allow changes in interest rates on such troubled mortgages. Senate Banking Committee Chairman Christopher Dodd (D-CT) has also indicated that he will introduce competing legislation to allow cramdowns in certain circumstances. Dodd outlined some provisions he expects to be included in his bill. First, bankruptcy court judges would be permitted to consider debtors’ individual circumstances when determining their ability to pay. Second, child support and alimony payments would be settled before mortgage obligations. Third, medical debts could be discharged in bankruptcy proceedings. Fourth, mortgages would be treated like other secured debt so that bankruptcy judges can alter loan terms. Finally, private student loans would be dischargeable in bankruptcy.

These legislative efforts in Congress may become unnecessary as the Bush Administration has reached a compromise deal with the industry that is intended to prevent mass foreclosures and allow certain debtors temporary relief from the prospect of bankruptcy and foreclosure.

On December 6, 2007, the Bush Administration and mortgage industry leaders announced that they had agreed on a plan to help certain struggling homeowners to refinance their mortgage loans. The centerpiece of the plan is a five-year freeze on interest rates for certain subprime loans in securitized pools and facing resets between January 1, 2008 and July 31, 2010. This freeze would apply to subprime adjustable-rate mortgages obtained between January 1, 2005 and July 31, 2007. The relief would be available to those with credit scores less than 660. The rationale given for this provision is that those with higher credit score can likely refinance their mortgages to ones with more favorable terms. In addition, homeowners must be current on their mortgages and must contact their mortgage loan servicer to receive this assistance. Also, this new assistance is only available to those with less than 3% equity in their homes. Finally, the original mortgages must have an initial fixed-rate of 36 months or less.

Should the homeowner meet the aforementioned criteria, voluntary action will be initiated to prevent foreclosure. Homeowners that can afford the starter rate and can refinance would be encouraged to get a mortgage that their income can sustain. Those that can afford the starter rate but cannot refinance will pay their reset rate or have their initial rate frozen for five years.

The Administration estimates that nearly 1.2 million homeowners would be eligible for assistance under this new effort. The plan was negotiated between the Bush Administration and HOPE NOW, an alliance of mortgage loan servicers, mortgage counselors, lenders, and financial services trade associations.

While many in Congress have praised the industry plan, others have argued that it doesn’t go far enough and that many struggling homeowners would be disqualified by the criteria set forth for the five-year interest rate freeze. Therefore, it is likely that legislative efforts in this area will continue to be pushed. Rep. Rep. Brad Miller (D-NC) has stated that he will continue to pursue the legislation he authored to permit cramdowns for primary residential mortgages. Meanwhile, Senate Judiciary Committee member Dick Durbin (D-IL) is expected to pursue his mortgage bankruptcy legislation discussed at the Committee’s December 5th hearing. Senate Banking Committee Chairman Chris Dodd (D-CT) agrees with Durbin that the industry plan does not go far enough.

At the end of 2007, the Congress passed and the President signed into law an omnibus federal spending bill that provides $180 million to the Neighborhood Reinvestment Corporation, a national public/private neighborhood development venture, to assist homeowners faced with foreclosure.

CUNA’s analysis of other legislative and Administration proposals to mitigate the effects of the subprime mortgage crisis can be accessed by clicking on the following links:

• Federal Housing Administration (FHA) Reform
• Government Sponsored Enterprises (GSE) Reform
• Subprime Mortgage Lending Legislation

CUNA will continue to closely monitor this rapidly changing situation to ensure that credit unions retain the ability to provide safe and affordable mortgage products to their members.

CONTACT: John Hildreth, (202) 508-6724, jhildreth@cuna.coop.

Related Documents:

CUNA Chairman Dan Mica, Letter of 12-12-07 to House Judiciary Committee Chairman, John Conyers regarding the Emergency Home Ownership and Mortgage Equity Protection Act

CUNA Chairman Dan Mica, Letter of 12-3-2007 to Senator Dick Durbin (D-IL) detailing CUNA’s proposed changes to S. 2136

CUNA Chairman Dan Mica, Letter of 11-15-2007 to House Judiciary Committee Chairman and Ranking Member detailing CUNA’s proposed changes to H.R. 3609

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