A Bankruptcy Mortgage Modification Amendment has been introduced as part of the Wall Street Reform and Consumer Protection Act (H.R. 4173) by, among others,  Representative Conyers, a Democrat from Michigan. The bill would allow Bankruptcy Judges to modify first mortgages on consumer’s primary residences in chapter 13 bankruptcy plans. Borrowers who owe more than their homes are worth would have the opportunity to force their lender to re-write their mortgage to come in line with the value of the home. For example, a family in California who owes $275,000 on a first mortgage and has seen their home value drop from $300,000 to $150,000 in two short years, would be able to re-write their mortgage through a chapter 13 plan so that the principal amount of the mortgage debt would become $150,000 which is equal to the current value of the home. The $125,000 that represented the “underwater” portion of the mortgage would be treated as unsecured debt paid out at much less than 100% through the life of the chapter 13 plan.

Many will remember that a similar effort spearheaded by Senator Dick Durbin failed earlier this year after the proposed bill took heavy fire from the banking lobby. H.R. 4173 is very similar to Senator Durbin’s earlier reform proposals which were first introduced in 2007. Ironically, the resurgence of bankruptcy reform legislation has been caused by a complete unwillingness on the part of banks and servicers to modify mortgages. Under current law, lenders are not required to modify first mortgages on borrower’s primary residences in bankruptcy. However, borrowers who owe more than their home is worth may be able to have second or third mortgages modified. Current bankruptcy law does allow for second and third liens to be stripped from borrower’s homes.

John O’Connor