Controversial Mortgage Bankruptcy Bill Passed

December 19th, 2007

Despite stiff bi-partisan opposition, the U.S. House Judiciary on Wednesday, passed after slight alterations, the highly debatable “Conyers Bill” aimed at retaining ownership of “certain” bankrupt property owners. The real estate boom has, over the years seen people investing more than their capability (thus falling short on their payments) or taking more property related loans (mortgage at high interest rates), which they are unable to repay. The government, through this bill attempts to curb the arising foreclosures of such mortgaged properties.

Only those property owners who have filed under Chapter 13 bankruptcy relief, holding sub-prime and non-traditional loans (i.e optional payments or just interest payments) from January 1, 2000 onwards are covered under this legislation. The debtor, of course must prove insufficiency of income after making payments of IRS specified expenses in order to avert foreclosure of the estate.

Under Chapter 13, the courts can restructure and manipulate the payment terms so as to safeguard both the debtor’s and the creditor’s interests. The courts, said Judiciary Chairman John Conyers, could reduce the enormous interests on mortgages, eliminate the excesses and hidden fees levied by the creditors, restructure the principal mortgage amount to highlight the estate’s real value. This would enable the borrower to manage his finances properly to avoid foreclosure and at the same time leave a fair chance for the creditor to recover his loan.

This would considerably modify the “creditor-friendly” code of 2005 whereby, the foreclosures on collaterals were common since the borrowers could seldom repay their loan (bankruptcy filing under Chapter 7).

Passed by a slim margin of two votes (17-15), the legislation’s main issue of contention is the “fairness” factor pertaining to the time frame. Last week, the Bush administration in collaboration with real estate related creditors proposed rate freeze- a relief for up-to-date mortgage payers on real estate loans from January 1, 2005 to July 2007-a far narrower time frame. Moreover, those who received no such solution to their increasing mortgage interest payments or debts felt victimized and unsupportive towards those receiving relief.

A reasonable argument against the Bill appeared on Wall Street Journal’s opinion piece today. It said that though stringent home loan payment terms are in favour of the creditor as there are opportunities to foreclose the property, fact is a softer treatment is meted to the real estate mortgagee in order to encourage capital flow in property lending market. The problem would remain unresolved.