Oct 02, 2008

The Bailout Legislation Provides More Help For Struggling Homeowners Than Many Commentators Think

Earlier this week, the House of Representatives shot down the Emergency Economic Stabilization Act of 2008, popularly known as "The Bailout". The Senate picked it up, passed easily after adding $100 billion and change in pork to buy some more votes from House Republicans, and the House is now expected to vote on it tomorrow (October 3). Meanwhile, despite predictions of doom and gloom by the folks pushing this bill, life and the stock market go on.

There is much to be said about this legislation from various perspectives -- political, economic, and financial -- but here I want to contradict an oft-expressed opinion: that homeowners facing foreclosure are not being helped by the bailout legislation.

The basic idea afloat out there is that absent a provision in the bill that would authorize Chapter 13 bankruptcy judges to modify residential mortgages and interest rates, the homeowners are being left high and dry. Not true. While such a bankruptcy provision would benefit a portion of the population in mortgage trouble, many more folks facing foreclosure either don't have sufficient income to propose a viable Chapter 13 plan, or just can't afford the legal fees.

While Chapter 13 can also be useful in scheduling missed payments over the course of the repayment plan, many -- if not most -- homeowners can afford to both keep their mortgage current and pay an extra amount into a repayment plan every month to pay off the arrears. Further, if missed payments are the only problem, many lenders are now amenable -- outside of bankruptcy -- to extending the loan period and tacking the missed payments on at the end.

Simply put, Chapter 13 is a relatively narrow remedy in the larger foreclosure context. The language in the failed legislation, on the other hand, would provide much broader relief to homeowners facing foreclosure. Here's why.

Under the bailout legislation, in a large number of foreclosure situations, the federal government will be involved in one way or another. That alone will be somewhat of monkey wrench in the foreclosure gears. But that's not all: All the government agency players will have to have a plan under which they will seek to keep homeowners in their home. This plan will provide a legal basis for advocates and housing counselors to push for meaningful modifications and relief from foreclosure.

While the federal agencies (and mortgage servicers, in cases where the mortgages continue to be privately owned) will have to take the impact on taxpayers into account when negotiating a mortgage workout, they will likely be willing to modify the mortgages down to the market value of the property, or even below, since the legislation prefers that mortgage workouts take place within the context of the HOPE for Homeowners Act as amended by section 124 of the Emergency Economic Stabilization Act. Further, the Government will, where appropriate, facilitate conversion of the old loan into a 30 year fixed-rate FHA insured mortgage as provided for in the HOPE for Homeowners Act.

In short, because of increased government involvement with foreclosures under a mandatory plan that encourages retention of home ownership, many more homeowners will be able to keep their homes than previously, and for those who don't qualify for help, the foreclosure machine is likely to be gummed up beyond all imagination. From my standpoint, this is a very good thing.