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August 29, 2014

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Foreclosure option on rocky turf in Senate

Bankruptcy court provision in Obama’s plan would let judges mandate loan rewrites

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Sen. Harry Reid "strongly supports" the provision, his spokesman said.

Sen. Harry Reid "strongly supports" the provision, his spokesman said.

John Ensign

John Ensign

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Legislation that could provide a last-ditch option for Nevada homeowners facing foreclosure has passed the House but is facing a tougher time in the Senate.

The bill, an element of President Barack Obama’s housing recovery plan, would give bankruptcy courts the authority to reduce mortgages as part of an intense court-monitored plan to restructure homeowner debt. Even families who don’t declare bankruptcy could benefit because the law would add pressure on lenders to rewrite loans before homeowners turn to bankruptcy court.

Nevada’s two Democratic Reps. Shelley Berkley and Dina Titus helped approve the measure in the House this month.

But the proposal faces a steeper climb in the Senate, where Republican opponents hold greater sway because of the chamber’s procedural rules, and nearly a dozen Democratic senators expressed dissatisfaction over a similar bill last year.

Judges have authority to rework the terms of loans on second homes or vacation properties — even yachts. Supporters say homeowners in distress should enjoy the same option.

Senate Majority Leader Harry Reid of Nevada said recently if ever there was an issue based on fairness, it is this one. Reid “strongly supports” the proposal, his spokesman said.

Mortgage bankers and financial services firms oppose the proposal. They believe giving judges the authority to rework mortgage contracts between lenders and borrowers will drive up homeownership costs nationwide as banks recoup losses by increasing interest rates, down payments and fees.

“We’re seriously concerned about that proposal in Obama’s plan because it would make buying a home more expensive for responsible consumers,” said a spokesman for Nevada Republican Sen. John Ensign, the chairman of his party’s policy committee. Republican Rep. Dean Heller voted against the bill in the House.

When Obama introduced the measure as part of his housing recovery plan, it was widely seen as providing the muscle needed to encourage mortgage lenders to work with homeowners to rewrite distressed loans.

Even though the financial services industry says it has reworked 4 million loans during the housing crisis, lenders have also been criticized as slow to write down more mortgages, by either reducing the principal or interest rate.

As the housing crisis intensified, most major lenders temporarily halted new foreclosure proceedings early this year as the new president’s housing proposal was being unveiled.

Still, Nevada had a record 8,400 foreclosures in February — raising the total this year to more than 14,000.

Jeremy Aguero, a principal analyst with Applied Analysis, an economic consulting firm in Las Vegas, said for many homeowners in Nevada, the bankruptcy provision “may well be the linchpin” to keeping their homes.

In Nevada, home prices have nose-dived from their peak in 2006, and houses statewide are now valued at half their top value. Without equity, many homeowners have difficulty refinancing at today’s lower interest rates.

It’s difficult to say how many homeowners would seek to save their homes through bankruptcy. The process is cumbersome and puts an invasive microscope on household finances. The Congressional Budget Office estimated of the 1 million homeowners nationwide who could qualify, 350,000 would undertake the option. Others estimate as many as 1.5 million homeowners may choose the option.

Mortgage bankers complain that the bankruptcy provision will encourage homeowners to seek court protection rather than work with their lenders to construct new payment schedules. The financial services industry says half of those in foreclosure never contacted their lender to rework the loan.

Scott Talbott, vice president of government affairs for the Financial Services Roundtable, which represents the nation’s leading banks and investment houses, said interest rates could rise by 1.5 percent as banks compensate for the additional risk.

“The whole purpose for not allowing the judge to change the mortgage in bankruptcy is to keep the cost of borrowing low so you can buy into the American dream,” he said.

How it came to be that owners of vacation homes can have their mortgages rewritten in bankruptcy court, but owners of primary residences cannot, is a matter for debate.

Bankruptcy law was substantially altered by Congress in 1978, and although lenders say primary residences were excluded to maintain the sanctity of the mortgage contract, others contend it was a last-minute deal between the House and Senate to secure passage of the bill 30 years ago.

Indiana Sen. Evan Bayh, a politically moderate Democrat, is working with Republican Sen. Arlen Specter of Pennsylvania on alternative provisions he hopes could forge a compromise in the Senate.

Bayh said the proposal perhaps could be scaled back so only those homeowners with subprime loans or who have experienced job loss could be eligible. He also suggested the possibility of ending the bankruptcy option once the recession has lifted.

The debate in the Senate is expected to unfold in coming weeks.

Ellen Harnick at the Center for Responsible Lending said reports show as many as 10 million homes nationwide are expected to go into foreclosure by 2012. The nation is on track to have 2.4 million foreclosures in 2009.

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