To help distressed homeowners avoid foreclosure, Democratic senators have proposed the "Foreclosure Prevention Act of 2008." The bill would help borrowers by potentially lowering the amounts they owe, and would free up more money to pay for the mortgage refinance of subprimes.

Senate Majority Leader Harry Reid recently announced a legislative proposal known as the "Foreclosure Prevention Act of 2008." Supporters claim that the bill can save a million or more homeowners from foreclosure while also helping to support communities hardest hit by this crisis.

Key points of refinancing legislation

Some of the more important components of the bill are as follows:

  • The legislation would provide additional funds to help pay for expert mortgage finance counseling for homeowners at risk for foreclosure.
  • The bill would also amend the current Bankruptcy Code to favor homeowners. Today, the Code lets bankruptcy judges modify mortgages on family farms and vacation properties, but the new changes would extend this authority to primary residences, as well. Judges will have to follow a narrow set of guidelines regarding the income of homeowners, but such changes would still help a significant number of borrowers.
  • The cap on government revenue bonds used to fund mortgage refinance of subprimes and help first-time homebuyers would be raised, in an effort to add loan liquidity and stimulate local and state real estate economies.
  • Another provision would make available Community Development Block Grant funds to areas devastated by the real estate crisis. This money could be used to help those communities fight foreclosure blight by buying unsold and vacant foreclosures, rehabbing them, and eventually selling them as affordable housing.
  • There's also language in the bill that would broaden and toughen the Truth-in-Lending Act by requiring lenders to provide greater disclosure about mortgages to consumers.

Potential opposition

The idea of letting local housing agencies refinance bad mortgages by issuing tax-exempt bonds has strong bipartisan support and the backing of the White House. But many mortgage companies and Republican officials object to the part of the legislation that lets judges alter the existing terms of home loans, because they say it would undermine market forces in the mortgage industry.

Industry insiders call the tactic of reducing mortgage payments and balances to bring those amounts more in line with the current market value of properties a "cram-down." Mortgage investors, opponents argue, pay the cost for leniency in bankruptcy courts, and then pass the cost of cram-downs along to others by raising interest rates and fees across the board. But some experts say that there's no historical evidence that cram-downs have a significant impact on other mortgages.

Whether the Act passes or not may depend upon whether the bankruptcy guideline provision survives until it's time to bring the bill to a vote. In the meantime, homeowners under duress are keeping their fingers crossed and hoping for help to refinance mortgage debt for their own financial survival.

Published on March 13, 2008