If you’re struggling with your mortgage on your primary home, it looks like you may now have some real home saving tools coming soon in the form of a B and K.

I have been writing about mortgage bankruptcy for quite sometime and how it would benefit struggling homeowners. So, I thought I would condense some of the bankruptcy basics for you to study and get educated on the subject.

Please remember that Citi is the only lender that has agreed to cooperate with the new bankruptcy deal announced last week with conditions.

In a statement, Citigroup said it would support Durbin’s legislation provided that it applied only to mortgages in effect before passage of the act. To be eligible, borrowers would have to contact their lenders and try to work things out before filing for bankruptcy.

Current bankruptcy laws do not allow borrowers to include their primary residence in bankruptcy proceedings. So this controversial move by Citi came as a surprise to many.

Citigroup is agreeing to the bill under the following conditions:

• It applies to loans issued up until the day that the bill is passed. It will not apply to any new mortgages issues by the lender.
• Borrowers have to show first that they made a good faith effort to approach their lender and get a loan workout or loan modification. They must show proof that bankruptcy was not their first option.
• Bankruptcy judges can strip away lenders’ creditor rights if they violated the Truth in Lending Act.

Current bankruptcy law allows judges to approve the loan modifications of the terms of certain debts, namely auto and student loans and second-home mortgages. In the case of second mortgages, if the value of the property falls below the loan amount, debtors potentially could reduce the balance of the loan to equal the current value of the property.

How the mortgage “cram down” bankruptcy legislation if enacted will help struggling homeowners:

• It will encourage lenders to offer more affordable and long term loan modificationsin order to keep homeowners out of the bankruptcy courts. I am sure lenders and mortgage servicers would rather do these loan modifications in secret then with the watchful eyes of the courts. So, this will give borrowers HUGE leverage in negotiating a favorbale loan modificationwith their mortgage servicer or lender.
• We will start seeing more voluntary principle reductions and the over all quality of loan modifications will improve dramatically. This will definitely result in fewer homeowners walking away from their under water homes.
• More ammo in bankruptcy court will mean that more homeowners will get to keep their homes. Currently courts do not have the power to modify home mortgages on a borrowers primary residences. Many homeowners who file for bankruptcy protection today in order to stop foreclosure do with little actual protection from the courts and many lose their homes anyway during the process.

I wrote about bankruptcy, lien stripping and principle reductions a few months ago. So I thought I would highlight some points here for my readers.

• If the courts remove this 2nd mortgage, this is known as “stripping” the lien, “cram down” or “strip down,” which can also occur if the loan is secured by other collateral that is part of the filing or if the home is not your principal residence, or even if the payment structure on the 2nd mortgage falls heavily during the bankruptcy filing itself.
• Additional liens on your home beyond your initial mortgage, whether you have taken a second mortgage or just another related lien, could be negated in the case of a Chapter 13 personal bankruptcy filing.
• Liens can be stripped off of the debtor’s assets in Chapter 11 or Chapter 13 when there is not enough equity in the asset, after deducting senior liens from the property’s current market value, to secure the unsecured in whole or in part, where the lien exceeds the value of the debtor’s property.
• Section 506 of the Bankruptcy Code acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches. To the extent that the claim exceeds the value of the collateral, that portion of the claim is unsecured.
• In Chapter 11 or Chapter 13, even voluntary liens, such as mortgages and security interests, can be stripped down to the value of the collateral, with the exception of voluntary liens secured only by the debtor’s residence. Congress is currently considering changes to bankruptcy law allowing the modification of home mortgages.
• Tax liens can also be stripped off in reorganization proceedings (Chapters 11 and 13) to the extent that the lien does not attach to equity in property. Tax liens can’t be avoided in Chapter 7 on the grounds that they impair exemptions; if the tax is dischargeable in the Chapter 7, the bankruptcy court can determine the amount of the lien that is secured at the time of the filing. Payment of that sum entitles the debtor to the release of the lien.

Read more on mortgage bankruptcy on your second mortgage here.

Moe’s most important tip: Ultimately, working with a qualified tax and real estate attorney or experienced real estate bankruptcy lawyer will help you present your case to the Federal Bankruptcy Court, so it’s important to get qualified legal advice in advance of any filings.

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This Thursday the House of Representatives is expected to vote on a bill that would provide much needed help to  struggling homeowners. The bankruptcy bill that we have been talking about for well over a year on LoanWorkout.org, HR 200, would allow bankruptcy courts to modify mortgages and slash principles for underwater homeowners.

See Moe’s past bankruptcy blog posts here:

The controversial bill would also shield mortgage servicers from investor lawsuits over loan modifications.

Maxine Waters (D-Calif.), chairwoman of  the Subcommittee on Housing and Community Opportunity Hearing said this in her opening statement yesterday.

“I am concerned there isn’t doing enough being done to modify loads and preventing foreclosures,” The chairwoman also expressed concern over the re-default rates. “When modifying loans servicers most ensure it is more affordable than before the modify, it makes little sense to modify a loan and still have it out of the reach of the bar.” she said.

“There are millions of families out there who are struggling and have tried to contact some of the people we have here testifying today,” she said.

A total of nine witnesses testified in from of the two House panels. The first panel the U.S. Department of Housing and Urban Development (HUD), the Office of Thrift Supervision (OTC) , the Office of the Comptroller of the Currency (OCC) and Federal Housing Finance Agency (FHA).

The OCC and the Office of Thrift Supervision regulate some of the largest mortgage servicers in the US.

Joseph H. Evers, deputy comptroller for large bank supervision at Office of the Comptroller of the Currency in a prepared statement said, “We have made much progress in the last year to develop and refine our data collection, validation, and reporting efforts, and our work in this area continues to evolve in response to supervisory needs and changing market trends.”

“We currently are working to provide additional data at a more granular level on the affordability of loan modifications as well as the types of loan modifications being implemented by the largest mortgage servicers. We continue to improve these efforts and to enhance the information we obtain, and we look forward to making the additional information available in future issues of our Report.”

The second panel included CEO’s and executives from mortgage servicers, Owen Financial Corporation, Wells Fargo Home Mortgage Servicing, Bank of America,  JP Morgan Chase and Steve Hemperly and Citi.

Steve Hemperly, executive vice president of mortgage default servicing at Citigroup, which holds 7% of the total loans in the US said;

“Our report will show that distressed borrowers serviced by Citi, who received modifications, reinstatements or repayment plans outnumbered those who were foreclosed by more than six to one in the fourth quarter of 2008.”

“The number of borrowers serviced by Citi who received long term solutions, in the form of loan modifications, in the fourth quarter of 2008 increased by approximately 51% compared with the third quarter of 2008.”

Sources:

FoxBusiness

LoanWorkout.org

After almost two years, it now looks like bankruptcy judges will soon be allowed to offer loan modifications through bankruptcy court as a last resort for a homeowner to stop foreclosure.

The process of claiming bankruptcy on your mortgage has been dubbed “cramdown.”

Under current BK laws, bankruptcy courts may reduce many forms of debt for struggling borrowers. Including but not limited to, boats, cars, vacation homes or family farms. But until now, not a primary residence.

The bankruptcy measure was approved by a 234-191 vote on Thursday in the U.S. House of Representatives.

It is reported that the new mortgage bankruptcy law will protect homeowners who cannot get help from their mortgage servicers by giving judges legal power to force the bank to either cut the interest rate on a home mortgage, the principle balance or all the above on a borrower’s primary residence.

This will take the important decision of to foreclose or not to foreclose out of the mortgage servicers hands in some cases and allow bankruptcy judges to have the 100% discretion to decide what is affordable long term for the homeowner. Meaning a long-term affordable loan modification.

A qualified loan modification will most likely will have to meet the standards set forth in Obama’s new Home Affordable Loan Modification Program that was announced on March 4 as part of his new housing rescue plan. The plan calls for lenders to cut a borrower’s monthly payment to as an affordable 31 percent of gross income by first reducing the interest rate on their mortgage and then possibly lengthening the repayment terms to make the loan payments even easier for the struggling borrower.

Homeowners wishing to take advantage of the new bankruptcy bill will have to comply with the provisions set forth in order to qualify. This would include the reimbursement to your lender for a portion of losses if the property is sold before the debtor completes a five-year bankruptcy repayment plan.

Chapter 13 of the bankruptcy code allows individuals with regular income to pay all or part of their debts without losing their homes to foreclosure. Chapter 13 of the bankruptcy code allows individuals with regular income to pay all or part of their debts without losing their homes to foreclosure.

The new bill will definitely result in more Chapter 13 bankruptcy filings by struggling homeowners. It is reported that at least 1 million borrowers will to benefit from the bill.

From Bloomberg:

“When it comes to housing, today is another example of why taxpayers are fed up with the way Washington works,” he said. “The American people are sick and tired of Washington forcing taxpayers to pay for those who have been irresponsible.”

But Michael Calhoun, president of the Center for Responsible Lending, a homeowner advocacy group, praised the House’s passage of the bill.

“Hundreds of thousands of families have lost their homes unnecessarily and tens of millions of neighboring families havewatched the value of their homes plummet. We urge the Senate to act quickly to approve this bill and put it on President Obama’s desk for his signature,” Calhoun said.

‘Not Perfect’

“This bill’s not perfect, but the process has worked better than anyone expected,” Representative Ellen Tauscher, a California Democrat and chairwoman of the New Democrat Coalition, said on the House floor. “Over the last couple of weeks we’ve worked together to make improvements to make sure bankruptcy is an option of last resort.”

The Senate may vote on a companion bill as early as next week, said Jim Manley, a spokesman for Majority Leader Harry Reid of Nevada.

The U.S. recession cut residential property values by $2.4 trillion, to $19.1 trillion, in 2008, according to estimates released this week by First American CoreLogic, a Santa Ana, California-based seller of mortgage and economic data.

House Republican Leader John Boehner of Ohio said the cram- down legislation was “disingenuously” titled the “Helping Families Save their Homes Act.”

“The measure forces those who have acted responsibly to subsidize scam artists, speculators and those who knowingly made bad decisions,” Boehner said in an e-mailed statement.

Read more from Bloomberg