79–006 

111TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 1st Session 111–19 

HELPING FAMILIES SAVE THEIR HOMES IN BANKRUPTCY 

ACT OF 2009 

FEBRUARY 24, 2009.—Committed to the Committee of the Whole House on the State 

of the Union and ordered to be printed 

Mr. CONYERS, from the Committee on the Judiciary, 

submitted the following 

R E P O R T 

together with 

MINORITY VIEWS 

[To accompany H.R. 200] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on the Judiciary, to whom was referred the bill 

(H.R. 200) to amend title 11 of the United States Code with respect 

to modification of certain mortgages on principal residences, and 

for other purposes, having considered the same, report favorably 

thereon with an amendment and recommend that the bill as 

amended do pass. 

CONTENTS 

Page 

The Amendment ...................................................................................................... 2 

Purpose and Summary ............................................................................................ 4 

Background and Need for the Legislation ............................................................. 5 

Hearings ................................................................................................................... 24 

Committee Consideration ........................................................................................ 24 

Committee Votes ...................................................................................................... 24 

Committee Oversight Findings ............................................................................... 29 

New Budget Authority and Tax Expenditures ...................................................... 30 

Congressional Budget Office Cost Estimate .......................................................... 30 

Performance Goals and Objectives ......................................................................... 34 

Constitutional Authority Statement ...................................................................... 34 

Advisory on Earmarks ............................................................................................. 34 

Section-by-Section Analysis .................................................................................... 35 

Changes in Existing Law Made by the Bill, as Reported ..................................... 38 

Minority Views ......................................................................................................... 44 


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THE AMENDMENT

The amendment is as follows: 

Strike all after the enacting clause and insert the following: 

SECTION 1. SHORT TITLE. 

This Act may be cited as the ‘‘Helping Families Save Their Homes in Bankruptcy Act of 2009’’. 

SEC. 2. ELIGIBILITY FOR RELIEF. 

Section 109 of title 11, United States Code, is amended— 

(1) by adding at the end of subsection (e) the following: ‘‘For purposes of 

this subsection, the computation of debts shall not include the secured or unsecured portions of— 

‘‘(1) debts secured by the debtor’s principal residence if the current value 

of such residence is less than the secured debt limit; or 

‘‘(2) debts secured or formerly secured by real property that was the debtor’s principal residence that was sold in foreclosure or that the debtor surrendered to the creditor if the current value of such real property is less than the 

secured debt limit.’’, and 

(2) by adding at the end of subsection (h) the following: 

‘‘(5) The requirements of paragraph (1) shall not apply in a case under chapter 

13 with respect to a debtor who submits to the court a certification that the debtor 

has received notice that the holder of a claim secured by the debtor’s principal residence may commence a foreclosure on the debtor’s principal residence.’’. 

SEC. 3. PROHIBITING CLAIMS ARISING FROM VIOLATIONS OF THE TRUTH IN LENDING ACT. 

Section 502(b) of title 11, United States Code, is amended— 

(1) in paragraph (8) by striking ‘‘or’’ at the end, 

(2) in paragraph (9) by striking the period at the end and inserting ‘‘; or’’, 

and 

(3) by adding at the end the following: 

‘‘(10) the claim for a loan secured by a security interest in the debtor’s principal residence is subject to a remedy for rescission under the Truth in Lending 

Act notwithstanding the prior entry of a foreclosure judgment, except that nothing in this paragraph shall be construed to modify, impair, or supersede any 

other right of the debtor.’’. 

SEC. 4. AUTHORITY TO MODIFY CERTAIN MORTGAGES. 

Section 1322 of title 11, United States Code, is amended— 

(1) in subsection (b)— 

(A) by redesignating paragraph (11) as paragraph (12), 

(B) in paragraph (10) by striking ‘‘and’’ at the end, and 

(C) by inserting after paragraph (10) the following: 

‘‘(11) notwithstanding paragraph (2) and otherwise applicable nonbankruptcy law, with respect to a claim for a loan originated before the effective date 

of this paragraph and secured by a security interest in the debtor’s principal 

residence that is the subject of a notice that a foreclosure may be commenced 

with respect to such loan, modify the rights of the holder of such claim (and 

the rights of the holder of any claim secured by a subordinate security interest 

in such residence)— 

‘‘(A) by providing for payment of the amount of the allowed secured 

claim as determined under section 506(a)(1); 

‘‘(B) if any applicable rate of interest is adjustable under the terms of 

such security interest by prohibiting, reducing, or delaying adjustments to 

such rate of interest applicable on and after the date of filing of the plan; 

‘‘(C) by modifying the terms and conditions of such loan— 

‘‘(i) to extend the repayment period for a period that is no longer 

than the longer of 40 years (reduced by the period for which such loan 

has been outstanding) or the remaining term of such loan, beginning 

on the date of the order for relief under this chapter; and 

‘‘(ii) to provide for the payment of interest accruing after the date 

of the order for relief under this chapter at a fixed annual rate equal 

to the currently applicable average prime offer rate as of the date of 

the order for relief under this chapter, corresponding to the repayment 

term determined under the preceding paragraph, as published by the 

Federal Financial Institutions Examination Council in its table entitled 

‘Average Prime Offer Rates—Fixed’, plus a reasonable premium for 

risk; and 


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‘‘(D) by providing for payments of such modified loan directly to the 

holder of the claim; and’’, and 

(2) by adding at the end the following: 

‘‘(g) A claim may be reduced under subsection (b)(11)(A) only on the condition 

that if the debtor sells the principal residence securing such claim, before receiving 

a discharge under this chapter and receives net proceeds from the sale of such residence, then the debtor agrees to pay to such holder— 

‘‘(1) if such residence is sold in the 1st year occurring after the effective 

date of the plan, 80 percent of the amount of the difference between the sales 

price and the amount of such claim (plus costs of sale and improvements), but 

not to exceed the amount of the allowed secured claim determined as if such 

claim had not been reduced under such subsection; 

‘‘(2) if such residence is sold in the 2d year occurring after the effective date 

of the plan, 60 percent of the amount of the difference between the sales price 

and the amount of such claim (plus costs of sale and improvements), but not 

to exceed the amount of the allowed secured claim determined as if such claim 

had not been reduced under such subsection; 

‘‘(3) if such residence is sold in the 3d year occurring after the effective date 

of the plan, 40 percent of the amount of the difference between the sales price 

and the amount of such claim (plus costs of sale and improvements), but not 

to exceed the amount of the allowed secured claim determined as if such claim 

had not been reduced under such subsection; and 

‘‘(4) if such residence is sold in the 4th year occurring after the effective 

date of the plan, 20 percent of the amount of the difference between the sales 

price and the amount of such claim (plus costs of sale and improvements), but 

not to exceed the amount of the allowed secured claim determined as if such 

claim had not been reduced under such subsection. 

‘‘(h) With respect to a claim of the kind described in subsection (b)(11), the plan 

may not contain a modification under the authority of subsection (b)(11)— 

‘‘(1) in a case commenced under this chapter after the expiration of the 15- 

day period beginning on the effective date of this subsection, unless— 

‘‘(A) the debtor certifies that the debtor attempted, not less than 15 

days before the commencement of the case, to contact the holder of such 

claim (or the entity collecting payments on behalf of such holder) regarding 

modification of the loan that is the subject of such claim; or 

‘‘(B) a foreclosure sale is scheduled to occur on a date in the 30-day period beginning on the date the case is commenced; and 

‘‘(2) in any other case pending under this chapter, unless the debtor certifies that the debtor attempted to contact the holder of such claim (or the entity collecting payments on behalf of such holder) regarding modification of the 

loan that is the subject of such claim, before— 

‘‘(A) filing a plan under section 1321 that contains a modification under 

the authority of subsection (b)(11); or 

‘‘(B) modifying a plan under section 1323 or 1329 to contain a modification under the authority of subsection (b)(11).’’. 

SEC. 5. COMBATING EXCESSIVE FEES. 

Section 1322(c) of title 11, United States Code, is amended— 

(1) in paragraph (1) by striking ‘‘and’’ at the end, 

(2) in paragraph (2) by striking the period at the end and inserting a semicolon, and 

(3) by adding at the end the following: 

‘‘(3) the debtor, the debtor’s property, and property of the estate are not liable for a fee, cost, or charge that is incurred while the case is pending and 

arises from a debt that is secured by the debtor’s principal residence except to 

the extent that— 

‘‘(A) the holder of the claim for such debt files with the court (annually 

or, in order to permit filing consistent with clause (ii), at such more frequent periodicity as the court determines necessary) notice of such fee, cost, 

or charge before the earlier of— 

‘‘(i) 1 year after such fee, cost, or charge is incurred; or 

‘‘(ii) 60 days before the closing of the case; and 

‘‘(B) such fee, cost, or charge— 

‘‘(i) is lawful under applicable nonbankruptcy law, reasonable, and 

provided for in the applicable security agreement; and 

‘‘(ii) is secured by property the value of which is greater than the 

amount of such claim, including such fee, cost, or charge; 

‘‘(4) the failure of a party to give notice described in paragraph (3) shall be 

deemed a waiver of any claim for fees, costs, or charges described in paragraph 


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(3) for all purposes, and any attempt to collect such fees, costs, or charges shall 

constitute a violation of section 524(a)(2) or, if the violation occurs before the 

date of discharge, of section 362(a); and 

‘‘(5) a plan may provide for the waiver of any prepayment penalty on a 

claim secured by the debtor’s principal residence.’’. 

SEC. 6. CONFIRMATION OF PLAN. 

Section 1325(a) of title 11, United States Code, is amended— 

(1) in paragraph (8) by striking ‘‘and’’ at the end, 

(2) in paragraph (9) by striking the period at the end and inserting a semicolon, and 

(3) by inserting after paragraph (9) the following: 

‘‘(10) notwithstanding subclause (I) of paragraph (5)(B)(i), whenever the 

plan modifies a claim in accordance with section 1322(b)(11), the plan provides 

that the holder of such claim retain the lien until the later of— 

‘‘(A) the payment of such holder’s allowed secured claim; or 

‘‘(B) discharge under section 1328; and 

‘‘(11) whenever the plan modifies a claim in accordance with section 

1322(b)(11), the court finds that such modification is in good faith and that the 

debtor did not obtain the extension, renewal, or refinancing of credit that gives 

rise to a modified claim by the debtor’s material misrepresentation, false pretenses, or actual fraud.’’. 

SEC. 7. DISCHARGE. 

Section 1328 of title 11, United States Code, is amended— 

(1) in subsection (a)— 

(A) by inserting ‘‘(other than payments to holders of claims whose 

rights are modified under section 1322(b)(11))’’ after ‘‘paid’’, and 

(B) in paragraph (1) by inserting ‘‘or, to the extent of the unpaid portion of an allowed secured claim, provided for in section 1322(b)(11)’’ after 

‘‘1322(b)(5)’’, and 

(2) in subsection (c)(1) by inserting ‘‘or, to the extent of the unpaid portion 

of an allowed secured claim, provided for in section 1322(b)(11)’’ after 

‘‘1322(b)(5)’’. 

SEC. 8. RULE OF CONSTRUCTION. 

Nothing in this Act or the amendments made by this Act shall be construed to 

modify any obligation of the Federal Housing Administration, the Veterans Administration, or the Department of Agriculture under a contract that guarantees or insures the payment of any part of a loan secured by a security interest in a principal 

residence. 

SEC. 9. EFFECTIVE DATE; APPLICATION OF AMENDMENTS. 

(a) EFFECTIVE DATE.—Except as provided in subsection (b), this Act and the 

amendments made by this Act shall take effect on the date of the enactment of this 

Act. 

(b) APPLICATION OF AMENDMENTS.—The amendments made by this Act shall 

apply with respect to cases commenced under title 11 of the United States Code before, on, or after the date of the enactment of this Act. 

PURPOSE AND SUMMARY

Our Nation is currently experiencing a mortgage foreclosure crisis unprecedented since the Great Depression. It is severely harming neighborhoods, communities, and the United States economy as 

a whole. Our economic recovery depends upon stabilizing the housing sector; and this requires more effective measures to stem the 

flood of foreclosures. 

Voluntary loan modification efforts have not been enough. Enabling bankruptcy courts to implement economically appropriate 

loan modifications where the parties are unwilling or unable to do 

so can have an impact on a sufficient scale and time frame to 

meaningfully address the foreclosure crisis. H.R. 200, the ‘‘Helping 

Families Save Their Homes in Bankruptcy Act of 2009,’’ gives the 

bankruptcy courts this ability, eliminating the anomaly in current 

law that prohibits judicial modification of primary residence mortgages. 


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1 Renae Merle, Mortgage Troubles Rise to Record Level, WASH. POST, Dec. 6, 2008 (reporting 

on data supplied by the Mortgage Bankers Association). 2Press Release, RealtyTrac, Foreclosure Activity Increases 81 Percent in 2008—Nearly 3.2 

Million Foreclosure Filings on More Than 2.3 Million Properties Reported (Jan. 15, 2009), at 

http://www.realtytrac.com/ContentManagement/ 

pressrelease.aspx?ChannelID=9&ItemID=5681&accnt=64847; see also Helping Families Save 

Their Homes: The Role of Bankruptcy Law: Hearing Before the S. Comm. on the Judiciary, 110th 

Cong. (2008) (testimony of Michael D. Calhoun, President, Center for Responsible Lending). 

(‘‘Using recent data from the Mortgage Bankers Association, we calculate that foreclosures on 

all types of mortgages are occurring at an annual rate of 2.3 million.’’). 3Kathleen M. Howley, Mortgage Delinquencies, Foreclosures Rise to Record, Bloomberg.com 

(Dec. 5, 2008), at http://www.bloomberg.com/apps/ 

news?pid=20601087&sid=a37uyBrX6dvY&refer=worldwide. 4Press Release, RealtyTrac, Foreclosure Activity Increases 81 Percent in 2008—Nearly 3.2 

Million Foreclosure Filings on More Than 2.3 Million Properties Reported (Jan. 15, 2009), at 

http://www.realtytrac.com/ContentManagement/ 

pressrelease.aspx?ChannelID=9&ItemID=5681&accnt=64847; In 2006, there were 1.2 million 

foreclosures in the United States, representing an increase of 42 percent over the prior year. 

Nelson D. Schwartz, Can the Mortgage Crisis Swallow a Town?, N.Y. TIMES, Sept. 4, 2007 5Mark Zandi, Op-ed, The Mortgage Mess, BOSTON GLOBE, July 22, 2007. Similarly, the Center 

for Responsible Lending, estimated that 20 percent of subprime home loans made between 2005 

and 2006 could end in foreclosure. Geraldine Fabrikant, After Foreclosure, a Big Tax Bill From 

the I.R.S., N.Y. TIMES, Aug. 20, 2007. In 2007, up to 2 million households were at risk of losing 

their homes through foreclosure. See, e.g., Steve Lohr, Loan by Loan, the Making of a Credit 

Squeeze, N.Y. TIMES, Aug. 19, 2007, at 1 Bus. Sec.; Evolution of an Economic Crisis? The 

Subprime Lending Disaster and the Threat to the Broader Economy: Hearing Before the Joint 

Economic Committee, 110th Cong. (2007) (prepared testimony of Martin Eakes, CEO of the Center for Responsible Lending) (citing a range of projected foreclosures with the highest at 1.7 million); Roger Lowenstein, Subprime Time—How Did Homeownership Become So Rickety, N.Y. 

TIMES MAGAZINE, Sept. 2, 2007, at 11. 6 Nelson D. Schwartz, Can the Mortgage Crisis Swallow a Town?, N.Y. TIMES, Sept. 4, 2007. 7Press Release, RealtyTrac, Foreclosure Activity Increases 81 Percent in 2008—Nearly 3.2 

Million Foreclosure Filings on More Than 2.3 Million Properties Reported (Jan. 15, 2009). 8 Id. 

9 Helping Families Save Their Homes in Bankruptcy Act of 2009 and Emergency Homeownership and Equity Protection Act: Hearing on H.R. 200 and H.R. 225 Before the H. Comm. on the 

Judiciary, 111th Cong. (2009) (testimony of Matthew Mason, Assistant Director, UAW-GM Legal 

Services Plan). 

BACKGROUND AND NEED FOR THE LEGISLATION

BACKGROUND

The Current Foreclosure Crisis 

An Overview 

Home foreclosures today are at an all-time high, and they are 

‘‘poised to accelerate as the country’s recession deepens,’’ according 

to industry data released in December 2008.1 During 2008, more 

than 2.3 million homes were in foreclosure,2 with one in ten Americans falling behind on their mortgage payments or facing foreclosure during the third quarter of that year.3 Compared to 2006, 

the number of properties in foreclosure during 2008 rose by 225 

percent.4 Mortgage foreclosures during 2007 through 2008 are estimated to have resulted in ‘‘a whopping $400 billion worth of defaults and $100 billion in losses to investors in mortgage securities.’’ 5 The foreclosure rate is ‘‘approaching heights not seen since 

the Great Depression.’’ 6

Certain parts of the Nation are experiencing this crisis more intensely than others. For example, more than 7 percent of housing 

units in Nevada received at least one foreclosure notice in 2008.7

Other top foreclosure States for 2008 were Florida, California, Colorado, Michigan, Ohio, Georgia, Illinois, and New Jersey.8 In the 

City of Detroit, an average of 126 foreclosures are occurring every 

day.9

The glut of foreclosures has adversely affected new home sales, 

and has depressed home values generally. Last year, Federal ReVerDate Nov 24 2008 01:37 Feb 25, 2009 Jkt 079006 PO 00000 Frm 00005 Fmt 6659 Sfmt 6601 E:\HR\OC\HR019.XXX HR019

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10Federal Reserve Chairman Ben S. Bernanke, Speech at the Women in Housing and Finance 

and Exchequer Club Joint Luncheon, Washington, DC (Jan. 10, 2008), at http:// 

www.federalreserve.gov/newsevents/speech/bernanke20080110a.htm; see, e.g., Brian Louis, 

Paulson Mortgage Plan Surfaces Too Late to Stem Housing Slide, Bloomberg.com (Dec. 7, 2007) 

(reporting 48 percent drop in new home sales since 2005). 11 James R. Hagerty & Ruth Simon, Housing Pain Gauge: Nearly 1 in 6 Owners ‘‘Under 

Water’’—More Defaults and Foreclosures Are Likely as Borrowers with Greater Debt Than Value 

in Their Homes Are Put in a Tight Spot, WALL ST. J., Oct. 8, 2008, at A5. 12 Id. 13Dennis Cauchon, Why Home Values May Take Decades To Recover, U.S.A. TODAY, Dec. 12, 

2008, at 1A; see also Bob Willis & Shobhana Chandra, U.S. Economy: Home Prices Fall at NearDepression Pace, Bloomberg.com (Dec. 23, 2008) (‘‘Sales of single-family houses in the U.S. 

dropped in November [2008] by the most in two decades and resale prices collapsed at a pace 

reminiscent of the Great Depression, dashing hopes that the market was close to a bottom.’’); 

Shobhana Chandra, U.S. Home Resales Fall; Prices Drop by Record 13.2%, Bloomberg.com (Dec. 

23, 2008); Kathleen M. Howley, Mortgage Delinquencies, Foreclosures Rise to Record, 

Bloomberg.com (Dec. 5, 2008) (reporting that the median home price in the fourth quarter of 

2008 will be 19% lower from the record in 2006’s second quarter, according to a November 24, 

2008 forecast by Fannie Mae, the world’s largest mortgage buyer). 14Dennis Cauchon, Why Home Values May Take Decades To Recover—Some See 2006 as ‘Lifetime’ Peak in Prices, USA TODAY, Dec. 12, 2008, at 1A. 15See, e.g., Vikas Bajaj, Home Prices Seem Far From Bottom, N.Y. TIMES, Oct. 16, 2008, at 

A1 (reporting that the ‘‘American housing market . . . is far from hitting bottom’’). 16David M. Herszenhorn & Vikas Bajaj, Tricky Task of Offering Aid to Homeowners, N.Y. 

TIMES, Apr. 6, 2008. 17 Id. 18Dennis Cauchon, Why Home Values May Take Decades To Recover, U.S.A. TODAY, Dec. 12, 

2008, at 1A. 19 Rod Dubitsky, et al., Foreclosure Update: over 8 million foreclosures expected, Credit Suisse, 

Fixed Income Research, Dec. 4, 2008. In 2007, Moody’s Economy.com Chief Economist Mark 

Zandi estimated that approximately 2.8 million loan defaults will occur in 2008 and 2009, although ‘‘[n]ot all will end in foreclosure.’’ ‘‘Of these,’’ he stated, ‘‘1.9 million homeowners will 

go through the entire foreclosure process and ultimately lose their homes.’’ The Looming Foreclosure Crisis: How To Help Families Save Their Homes: Hearing Before the S. Comm. on the 

serve Chairman Ben Bernanke acknowledged that ‘‘housing starts 

and new home sales have both fallen by about 50 percent from 

their respective peaks.’’ 10 And, as The Wall Street Journal reported 

in October 2008, ‘‘The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the 

home is worth, raising the possibility of a rise in defaults—the very 

misfortune that touched off the credit crisis last year.’’ 11 The Journal explained that more foreclosures are likely ‘‘because it is hard 

for borrowers in financial trouble to refinance or sell their homes 

and pay off their mortgage if their debt exceeds the home’s 

value.’’ 12

Home values nationwide have fallen an average of 19% from 

their peak in 2006, and this ‘‘price plunge has wiped out trillions 

of dollars in home equity.’’ 13 And some predict that home values 

‘‘may take decades to return to the heights of 21⁄2 years ago.’’ 14

As enormous as the losses to date have been, projections of what 

lies ahead appear to be even more dire.15 Some economists fear 

‘‘the tide of foreclosures’’ may become ‘‘self-perpetuating.’’ 16 As 

Susan Wachter, a real estate finance professor at the Wharton 

School of the University of Pennsylvania, explained, ‘‘In the market 

that we have in front of us, prices decline and supply increases, 

driving prices down further. The worst case is not a recession but 

a housing depression.’’ 17 She projects that ‘‘foreclosures and tight 

credit could send home prices falling to the point that millions of 

families and thousands of banks are thrust into insolvency.’’ 18

Credit Suisse estimates that there may be more than eight million foreclosures over the next 4 years in the United States, accounting for 16 percent of all mortgages, including 59 percent of all 

subprime mortgages and more than 11 percent of all other mortgages, including Alt-A, option ARMS, and even prime mortgages.19


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Judiciary, 110th Cong. (2007) (prepared testimony of Mark Zandi, Chief Economist, Moody’s 

Economy.com). 20 Id.; cf. Helping Families Save Their Homes: The Role of Bankruptcy Law: Hearing Before 

the S. Comm. on the Judiciary, 110th Cong. (2008) (testimony of Michael D. Calhoun, President, 

Center for Responsible Lending) (estimating that 6.5 million homes, i.e., ‘‘one in eight homes 

with outstanding mortgages, will be lost to foreclosre over the next 5 years,’’ according to industry data). 21 In the spring of 2008, ‘‘industry analysts estimated that as many as three million subprime 

mortgages could end up in foreclosure over the next several years.’’ Edmond L. Andrews, Relief 

for Homeowners Is Given to a Relative Few, N.Y. TIMES, Mar. 4, 2008. 22 Center for Responsible Lending, Loan Foreclosures & Delinquencies vs. Lender Workouts, 

Sept. 2008. 23Fannie Mae: No Home Market Rebound Till 2010, DETROIT NEWS, Jan. 8, 2008. 24 Evolution of an Economic Crisis? The Subprime Lending Disaster and the Threat to the 

Broader Economy: Hearing Before the Joint Economic Committee, 110th Cong. (2007) (prepared 

testimony of Martin Eakes, CEO of the Center for Responsible Lending); see, e.g., Op ed., Jack 

Kemp, Bringing Bankruptcy Home, L.A. TIMES, Jan. 18, 2008 (‘‘It is clear that sub-prime loan 

foreclosures are only going to get worse.’’); Edmund L. Andrews, In Washington, Measuring a 

Lifeline, N.Y. TIMES, Aug. 28, 2007 (‘‘ ‘This is really just the beginning,’ said Karen Weaver, global director for securitization research at Deutsche Bank. ‘There’s a big wave of defaults coming 

over the next 12 to 18 months.’ ’’). 25 Evolution of an Economic Crisis? The Subprime Lending Disaster and the Threat to the 

Broader Economy: Hearing Before the Joint Economic Committee, 110th Cong. (2007) (prepared 

testimony of Martin Eakes, CEO of the Center for Responsible Lending); see, e.g., Edmund L. 

Andrews, In Washington, Measuring a Lifeline, N.Y. TIMES, Aug. 28, 2007 (‘‘Deutsche Bank estimates that $400 billion in subprime loans are scheduled for rate increases of 30 percent or more 

by the end of 2008). 26 Ruth Simon, Mortgages Made in 2007 Go Bad at Rapid Clip, +WALL ST. J., Aug. 7, 2008. 27 Id. 28Stephanie Armour, Job Cuts Adding to Growing Number of Housing Defaults, U.S.A. 

TODAY, Dec. 15, 2008, at 1A. 29Letter from Gerald M. Howard, President & Chief Executive Officer, National Association 

of Home Builders, to Members of Congress (Jan. 14, 2009) (on file with the Committee). 

If the Nation were to experience a severe recession, Credit Suisse 

estimates that the number could rise to 10.2 million foreclosures.20

This new forecast from Credit Suisse is up sharply from the two 

to six million foreclosure range cited in previous estimates from industry sources.21 And this is in addition to the 1.2 million homes 

estimated to have been already lost to foreclosure.22 Fannie Mae 

predicts that there may not be a turnaround until 2010, and that 

the current crisis and ‘‘its effect on the housing market will be a 

drag on the entire U.S. economy.’’ 23

Initially, the foreclosure crisis was driven by defaults on 

subprime mortgages. In 2007, analysts correctly predicted that the 

‘‘worst lay ahead’’ 24 in that many subprime borrowers would face 

40 percent or greater increases in their monthly mortgage payments once their initial ‘teaser’ rates expire and their fixed interest 

rates reset into higher-rate variable rates.25 It is estimated that 65 

percent of subprime loans originated in 2007 will end up in default, 

compared with 45 percent of those originated in 2006.26

But prime mortgages originated in 2007 are also expected to go 

bad at a greater rate than those from 2006. An analysis prepared 

in August 2008 for The Wall Street Journal revealed that 0.91 percent of prime mortgages from 2007 were seriously delinquent—either in foreclosure or at least 90 days past due—after 12 months. 

The equivalent figure for 2006 prime mortgages was just 0.33 percent in the first year.27

The spike in unemployment is certainly augmenting the mortgage foreclosure crisis.28 Last year, nearly 2.6 million jobs were 

lost, with three-quarters of these losses occurring in the final 4 

months of the year.29 Job loss not only makes it hard for homeowners to keep up with payments on existing mortgages; it also 


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30 Id. (‘‘ ‘‘Many people have adjustable-rate mortgages that they were planning on refinancing,’ 

says Elena Rivkin Franz, a real estate lawyer in the San Francisco area. ‘Unfortunately, if you 

don’t have a steady stream of income, you can’t get a refinance, or at least an affordable one.’ ’’). 31William C. Apgar et al., The Municipal Cost of Foreclosures: A Chicago Case Study, 

Homeonwership Preservation Foundation Housing Finance Policy Research Paper No. 2005–1, 

at 1 (Feb. 27, 2005). 32 Ben Bernanke, Federal Reserve Chairman, Remarks at the Independent Community Bankers Conference (Mar. 4, 2008) (reprinted by Bloomberg.com, available at http:// 

www.bloomberg.com/apps/news?pid=20601068&sid=apeU.0IaETdM&refer=economy). 33See Center for Responsible Lending, Updated Projections of Subprime Foreclosures in the 

United States and Their Impact on Home Values and Communities, Aug. 2008, available at 

http://www.responsiblelending.org/pdfs/updated-foreclosure-and-spillover-brief-8-18.pdf. 34 Ben Bernanke, Chairman, Federal Reserve, Remarks at the Independent Community Bankers Conference (Mar. 4, 2008) (reprinted by Bloomberg.com, available at http:// 

www.bloomberg.com/apps/news?pid=20601068&sid=apeU.0IaETdM&refer=economy). 35 Catherine Rampell, Housing Resales Rose 5.5% in September, N.Y. TIMES, Oct. 24, 2008, at 

B7. 36 Id. 37 Id. 38 Vikas Bajaj, U.S. Vows More Help for Homeowners, N.Y. TIMES, Oct. 24, 2008 (Chairman 

Bair was testifying about an FDIC proposal to use Federal loan guarantees to encourage 

servicers to voluntarily modify failing loans). 

makes it hard for homeowners with adjustable rate mortgages to 

refinance at an more affordable fixed rate.30

The societal and economic costs of home foreclosures are not only 

devastating to the families that directly experience them. Foreclosures depress home values across entire communities. A single 

foreclosure ‘‘could impose direct costs on local government agencies 

totaling more than $34,000.’’ 31 Federal Reserve Chairman Ben 

Bernanke noted, ‘‘At the level of the individual community, increases in foreclosed-upon and vacant properties tend to reduce 

house prices in the local area, affecting other homeowners and municipal tax bases.’’ 32 As a consequence of nearby foreclosures on 

subprime loans, forty million homeowners will see their property 

values decline as by more than $350 billion.33 And these are just 

the effects of subprime foreclosures; foreclosures on prime and ‘‘AltA’’ loans will push the losses much higher. 

Chairman Bernanke further noted, ‘‘At the national level, the 

rise in expected foreclosures could add significantly to the inventory of vacant unsold homes—already at more than 2 million units 

at the end of 2007—thereby putting further pressure on house 

prices and housing construction.’’ 34 In fact, the National Association of Realtors estimates that 35 to 40 percent of resold homes nationwide were distressed assets.35 And, as Moody’s Economy.com 

Chief Economist Mark Zandi observed, ‘‘All indications are that we 

have a long way to go before the housing market stabilizes.’’ 36 In 

light of the tight credit market and the reluctance of Americans to 

purchase a home when they expect prices to keep falling, he added, 

‘‘It’s about as bad a market as you can get.’’ 37

In the 18 months since the Judiciary Committee first began exploring the foreclosure crisis, solutions offered by the industry and 

the Federal Government have failed to address the problem, and 

may have exacerbated it. Voluntary solutions from the industry 

have fallen far short of what is necessary to contain the problem. 

The urgency of more potent government intervention could not be 

overstated. As FDIC chairman Sheila Bair recently testified, ‘‘We 

are behind the curve. . . . We are falling behind. . . . [W]e need 

to act and we need to act quickly and we need to act dramatically.’’ 38


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39 A ‘‘subprime mortgage’’ is typically considered to be a security interest in the borrower’s 

home that secures a debt for a loan that has an annual percentage rate that is higher than 

that of a conventional 30-year mortgage. See, e.g., H.R. 3519, the Mortgage Reform and AntiPredatory Lending Act of 2007, 110th Cong. (2007). 40 A ‘‘nontraditional mortgage’’ is typically defined as a security interest in the debtor’s principal residence that secures a debt for a loan that at any period during the term of the loan 

provides for the deferral of the payment of principal or interest by permitting periodic payments 

that do not cover the full amount of interest due or that cover only the interest rate. The definition does not include a home equity line of credit that is in a subordinate loan position or a 

reverse mortgage. Interagency Guidance on Nontraditional Mortgage Product Risks—Final 

Guidance, 71 Fed. Reg. 58609–18 (Oct. 4, 2006), at http://www.fdic.gov/regulations/laws/federal/ 

2006/06noticeFINAL.html. 41 Robert K. Steel, Undersecretary, U.S. Treasury, Remarks to the NYC Subprime Lending 

and Foreclosure Summit, Dec. 12, 2007. 42 Id. 43 Id. 44 Edward Vincent Murphy, Congressional Research Report to Congress, Subprime Mortgages: 

Primer on Current Lending and Foreclosure Issues, RL33930, at 3 (Mar. 19, 2007). 45 Rick Brooks & Ruth Simon, Subprime Debacle Traps Even Very Credit-Worthy, WALL. ST. 

J., Dec. 3, 2007, at A1. 46 Id. 47 Id. 

Origins of the Crisis 

Starting in the 1990’s and then surging up through 2006, millions of subprime 39 and nontraditional 40 mortgages were issued. 

According to the U.S. Treasury Department, there were fewer than 

one million of these mortgages in 2000; today there are an estimated six million of them,41 at an approximate value of $1 trillion.42

As a result of these mortgages, homeownership rates ‘‘among minorities increased to new highs.’’ 43 The Congressional Research 

Services found, however, that subprime mortgages were ‘‘disproportionately used by the elderly and members of minority groups,’’ and 

that there is some evidence that minorities who could have qualified for cheaper prime loans instead borrowed in the more expensive subprime market.’’ 44

These mortgages were also often marketed to people with ‘‘credit 

scores high enough to qualify for conventional loans with far better 

terms,’’ according to an analysis prepared for The Wall Street Journal.45 In 2005, the peak year of the subprime mortgage boom, ‘‘borrowers with such credit scores got more than half—55%—of all 

subprime mortgages that were ultimately packaged into securities 

for sale to investors[.]’’ 46 As The Wall Street Journal observed, 

‘‘The surprisingly high number of subprime loans among more 

credit-worthy borrowers shows how far such mortgages have 

spread into the economy—including middle-class and wealthy communities where they once were scarce.’’ 47

Losses started in the subprime market, where the most common 

loan marketed during the past 4 years was a highly risky loan 

called a hybrid adjustable-rate mortgage (ARM), often known as a 

2/28 or 3/27 because the interest rate is fixed for either two or 3 

years, and then is adjustable typically every 6 months for the balance of the 30-year term. There are three particularly problematic 

aspects of this type of loan: (1) the rate increases, often sharply, 

at the end of the initial period, and often without regard to whether interest rates in the economy stay the same or even decline; (2), 

lenders typically made these loans with the understanding that the 

borrower could not afford the rate increase, and will be required to 

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48 Additionally, subprime lenders generally did not escrow for taxes and insurance as prime 

lenders do, which left many families reeling when those bills came due. This practice gives the 

borrower the impression that the payment is affordable when, in fact, there are significant additional costs. A study by the Home Ownership Preservation Initiative in Chicago found that for 

as many as one in seven low-income borrowers facing difficulty in managing their mortgage payments, the lack of escrow of tax and insurance payments were a contributing factor. Partnership 

Lessons and Results: Three Year Final Report, Home Ownership Preservation Initiative, at 31 

(July 17, 2006), at http://www.nhschicago.org/downloads/82HOPI3YearReportlJul17-06.pdf 49 Ben S. Bernanke, Federal Reserve Chairman, Speech at the Women in Housing and Finance and Exchequer Club Joint Luncheon, Washington, DC (Jan. 10, 2008), at http:// 

www.federalreserve.gov/newsevents/speech/bernanke20080110a.htm 50 Id. 51 Id. 52 Rick Brooks & Ruth Simon, Subprime Debacle Traps Even Very Credit-Worthy As Housing 

Boomed, Industry Pushed Loans To a Broader Market, WALL ST. J., Dec. 3, 2007, at A1. 53Mortgage brokers play a key role in today’s mortgage market. According to the Mortgage 

Bankers Association, mortgage brokers in 2006 originated 45 percent of all mortgages, and 71 

percent of subprime loans. See Mortgage Bankers Association, Research Data Notes: Residential 

Mortgage Origination Channels (Sept. 2006). 

tails the payment of a substantial ‘‘prepayment’’ penalty, which 

typically equals three to 4 percent of the loan balance.48

Federal Reserve Chairman Ben Bernanke in January 2008 noted 

that ‘‘poor underwriting and, in some cases, fraud and abusive 

practices contributed to the high rates of delinquency that we are 

now seeing in the subprime ARM market.’’ 49 He explained, ‘‘[T]he 

more fundamental reason for the sharp deterioration in credit quality was the flawed premise on which much subprime ARM lending 

was based: that house prices would continue to rise rapidly.’’ 50 He 

continued: 

When house prices were increasing at double-digit rates, 

subprime ARM borrowers were able to build equity in 

their homes during the period in which they paid a (relatively) low introductory (or ‘‘teaser’’) rate on their mortgages. Once sufficient equity had been accumulated, borrowers were often able to refinance, avoiding the increased 

payments associated with the reset in the rate on the 

original mortgages. However, when declining affordability 

finally began to take its toll on the demand for homes and 

thus on house prices, borrowers could no longer rely on 

home-price appreciation to build equity; they were accordingly unable to refinance and found themselves locked into 

their subprime ARM contracts. Many of these borrowers 

found it difficult to make payments at even the introductory rate, much less at the higher post-adjustment rate. 

The result, as I have already noted, has been rising delinquencies and foreclosures, which will have adverse effects 

for communities and the broader economy as well as for 

the borrowers themselves.51

It appears that many borrowers who are losing their homes to 

foreclosure could have qualified for more affordable, conventional 

loans. A study for The Wall Street Journal found that of the 

subprime loans originated in 2006 that were packaged into securities and sold to investors, 61 percent ‘‘went to people with credit 

scores high enough to often qualify for conventional [i.e., prime] 

loans with far better terms.’’ 52 Financial incentives encouraged 

mortgage brokers and lenders to aggressively market highly risky 

exploding ARM loans instead of the sustainable loans for which 

borrowers qualified.53 As former Federal Reserve Chairman Alan 

Greenspan explained: 


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54 Jon Meacham & Daniel Gross, The Oracle Reveals All—Did the Fed Cause the Real-Estate 

Bubble To Burst? Are We Entering a Recession? And Who Should Be Our Next President? A Candid Conversation., NEWSWEEK, Sept. 24, 2007, at 32, 33. Similarly, Federal Reserve Chairman 

Ben Bernanke outlined the need for further analysis: 

The recent developments in U.S. and foreign financial markets will stimulate considerable review and analysis in the months and years to come. Around the world, legislatures, regulators, supervisors, accounting boards, central banks, and others with responsibility for oversight of the financial system are already hard at work trying to distill the lessons to be drawn from this experience and their implications for policy. Many 

in the private sector, including banks, credit-rating agencies, and the investment community, are likewise actively reviewing and responding to these developments. Some of 

the areas that will draw scrutiny are the appropriate use of credit ratings by investors, 

banks, and supervisors; the need for enterprise-wide, better-integrated risk-management techniques in large financial institutions; the appropriateness of accounting rules 

governing asset valuation and the use of off-balance-sheet vehicles; and weaknesses in 

the originate-to-distribute model and in the design of structured credit products, among 

many others. In the longer term, the response of the public and private sectors to this 

experience should help create a stronger financial system. 

Ben S. Bernanke, Federal Reserve Chairman, Speech at the Women in Housing and Finance 

and Exchequer Club Joint Luncheon, Washington, D.C. (Jan. 10, 2008), at http:// 

www.federalreserve.gov/newsevents/speech/bernanke20080110a.htm. 55 Brian Louis, Paulson Mortgage Plan Surfaces Too Late to Stem Housing Slide, 

Bloomberg.com (Dec. 7, 2007). 56Mark Zandi, Op-ed, The Mortgage Mess, BOSTON GLOBE, July 22, 2007. 57 Id. 

The big demand was not so much on the part of the borrowers as it was on the part of the suppliers who were giving loans which really most people couldn’t afford. We created something which was unsustainable. And it eventually broke. If it weren’t for securitization, the subprime 

loan market would have been very significantly less than 

it is in size.54

Impact of the Crisis 

Impact on Home Values Nationwide 

In 2007, Mark Zandi, chief economist of Moody’s Economy.com, 

correctly predicted that ‘‘[e]xisting home prices may fall as much as 

15 percent by 2009 from their peak’’ in 2006 55 and that the ‘‘fallout’’ would hit nearly all of us.56 He explained: 

First, home values will sink. Loans will be tougher to 

get, meaning fewer families will qualify for mortgages. 

Foreclosure sales will put more properties on the market 

at steep discounts. Less housing demand and more supply 

add up to lower prices. 

Homeowners will find it more difficult to tap the equity 

in their homes for cash via home-equity loans or cash-out 

refinancing. Such lending is already fading quickly. 

On the other side of the coin are investors who chose the 

riskier flavors of the new mortgage securities and now face 

big losses. If that sounds like someone else’s problem, 

think again. Lots of pension plans that manage the savings of millions of ordinary workers and retirees have invested in hedge funds in recent years. Many of those funds 

are exposed.57

Depressed economic conditions in an area can further depress the 

housing market there. According to the Mortgage Bankers Association, ‘‘[H]eavy job losses in the Midwest states of Ohio, Michigan 

and Indiana and the collapse of previously booming housing markets in California, Florida, Nevada and Arizona’’ exacerbated the 


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58Martin Crutsinger, New Mortgage Foreclosures Set Record, Yahoo!Finance—Associated 

Press, Sept. 6, 2007, at http://www.washingtonpost.com/wp-dyn/content/article/2007/09/06/ 

AR2007090601677l2.html. 59 Erika Lovley, Mortgage Meltdown Leads to Lost Jobs in Arizona, POLITICO, Sept. 5, 2007, 

at 12. 60Paul Krugman, Op-ed, Henry Paulson’s Priorities, N.Y. TIMES, Dec. 10, 2007 (quoting U.S. 

Treasury Secretary Henry Paulson). 61 Id. 62 Henry Paulson, Secretary, U.S. Treasury, Remarks on Actions Taken and Actions Needed 

in U.S. Mortgage Markets at the Office of Thrift Supervision National Housing Forum (Dec. 3, 

2007). 63 Robert K. Steel, Undersecretary, U.S. Treasury, Remarks to the NYC Subprime Lending 

and Foreclosure Summit, Dec. 12, 2007. 64See, e.g., Carolyn Said, Modified Mortgages: Lenders Talking, Then Balking, SAN FRANCISCO

CHRONICLE, Sept. 13, 2007 (reporting that a Mortgage Bankers Association representative acknowledged that a ‘‘foreclosure can cost the lender from 20 to 40 percent of the loan balance’’); 

Mark Zandi, A Step Behind, Moody’s Economy.com, Dec. 13, 2007 (noting that ‘‘[e]ven in less 

stressed times, homes in foreclosure sell at a 20% to 30% discount to prevailing market values, 

driving down surrounding house prices’’). 65William C. Apgar et al., The Municipal Cost of Foreclosures: A Chicago Case Study, 

Homeonwership Preservation Foundation Housing Finance Policy Research Paper No. 2005–1, 

at 1 (Feb. 27, 2005). 66Gretchen Morgenson, Baltimore Is Suing Bank Over Foreclosure Crisis, N.Y. TIMES, Jan. 8, 

2008. 67 Id. 

foreclosure rates in these areas.58 In Michigan, for example, where 

several major manufacturers have filed for bankruptcy, unemployment rates have spiked. Representative John Dingell (D-MI) has 

noted the ‘‘vicious cycle’’ as homes in affected communities depreciate in value, are foreclosed upon, and left to decay, with little 

hope of attracting new buyers.59

Impact on Communities 

Not only is foreclosure in neither the homeowner’s nor the lender’s interest; it also adversely affects entire neighborhoods and 

communities. As Treasury Secretary Paulson noted, ‘‘Foreclosure is 

to no one’s benefit.’’ 60 He acknowledged, for example, ‘‘estimates 

that mortgage investors lose 40 to 50 percent on their investment 

if it goes into foreclosure.’’ 61 The damage of foreclosure, he noted, 

is ‘‘not limited only to those who lose their homes’’ as ‘‘[homes in 

foreclosure can pose costs for whole neighborhoods, as crime goes 

up and property values decline.’’ 62 Another Treasury Department 

official observed, ‘‘Concentrated foreclosures drive down property 

values and undermine the financial stability of families, communities and ultimately our economy.’’ 63 Economists and the mortgage lending industry agree.64

The rising incidence of foreclosures is also having broader societal impacts. While municipal tax revenues fall, greater demands 

for fire and police protection are presented by abandoned properties 

that become havens for arson, drug use, and prostitution. According to a study commissioned by the Homeownership Preservation 

Foundation of Minneapolis, various costs incurred by government 

agencies responding to foreclosures in Chicago and Cook County, Illinois amounted to $34,199 for each foreclosure.65

The City of Baltimore has filed a Federal suit against Wells 

Fargo for allegedly predatory subprime lending practices targeting 

African American residents.66 Among other relief, Baltimore is 

seeking damages for the increased l costs it has incurred for fire, 

police, and other services as a result of home mortgage foreclosures.67


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68 Jonathan Mummolo & Bill Brubaker, As Foreclosed Homes Empty, Crime Arrives, WASH. POST, Apr. 27, 2008, at A1. 69 J.W. Elphinstone, Foreclosures, Vacancies and Crime—The Surge in Defaults on Risky Mortgages is Having a Ripple Effect in Some Cities, PORTLAND PRESS HERALD—MAINE SUNDAY TELE- GRAM, Nov. 14, 2007. 70 Id. 71 Id. 72 Id. 73 Id. 74 John Leland, Baltimore Finds Subprime Crisis Snags Women, N.Y. TIMES, Jan. 15, 2008. 75 Id. 76Susan Schmidt & Maurice Tamman, Housing Push for Hispanics Spawns Wave of Foreclosures, WALL ST. J., Jan. 5, 2009. 77 Id. 

The growing foreclosure crisis has confronted suburban law enforcement officials with an unfamiliar challenge: policing empty 

houses. As evictions mount and houses remain vacant for months 

or even years, these properties become havens for squatters, vandals, thieves, partying teenagers, and worse.68 In some areas, police officers are targeting vacant houses for regular patrols, using 

maps of foreclosed properties as guides, while working with community watch groups to identify trouble spots. 

A joint study by the Georgia Institute of Technology and the 

Woodstock Institute showed that when the foreclosure rate increases 1 percentage point, neighborhood violent crime rises 2.33 

percent.69 As one of the study’s researchers explained, ‘‘The key 

here is the concentration of those foreclosures at a neighborhood 

level. When you have more than one foreclosure in a few block 

area, that’s when you start to think about the effects on property 

values and the effects on crime.’’ 70

Home foreclosure has brought increased criminal activity into 

middle class neighborhoods such as the historic Westview neighborhood of Atlanta, Georgia, where 22 of the 85 bungalows in were vacant in 2007 as the result of foreclosure and mortgage fraud, and 

‘‘house fires, prostitution, vandals and burglaries’’ have terrorized 

the remaining residents.71 Similarly, a subdivision near Sacramento, California that ‘‘sprouted 10,000 homes in 4 years’’ now 

has many homes that ‘‘stand empty, weeds overtaking lawns, signs 

lining the street: ‘Bank Repo,’ ‘For Rent,’ ‘No trespassing—bank 

owned property.’ A typical home’s value has dropped from about 

$570,000 to the low $400,000’s.’’ 72 The remaining ‘‘homeowners are 

fighting what typically have been considered inner city problems of 

gangs, drugs, theft and graffiti.’’ 73

Impact on Women and Minorities 

Women and minorities have been particularly impacted by the 

foreclosure crisis. The New York Times reported that for each of 

the past 4 years, more than half the foreclosures in a Baltimore 

neighborhood were homes owned primarily by women.74 Nationwide, women are 32 percent more likely to have received subprime 

loans than men, according to the Consumer Federation of America.75 African-American and Latino borrowers likewise appear to 

have been disproportionately marketed subprime mortgages.76 For 

instance, lending data for 2005 show that more than half of African-American borrowers, and four out of ten Latino mortgage borrowers, received loans that were higher-cost, an indicator of 

subprime status.77


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78Debbie Gruenstein et al., Unfair Lending: The Effect of Race and Ethnicity on the Price of 

Subprime Mortgages, Center for Responsible Lending, at 3 (May 31, 2006). 79 Ending Mortgage Abuse: Safe Guarding Homebuyers: Hearing Before the Subcomm. on 

Housing, Transportation, and Community Development of the S. Comm. on Banking, Housing, 

and Urban Affairs, 110th Cong. (2007) (testimony of Wade Henderson, President and Chief Executive Officer, the Leadership Conference on Civil Rights). 80 AARP Public Policy Institute, ‘‘A First Look at Older Americans and the Mortgage Crisis,’’ 

Insight on the Issues (Sept. 2008). 81 Id. 82 Emily Brandon, Study: Falling Housing Prices are Jeopardizing Retirement Security, U.S. 

NEWS & WORLD REP., Sept. 22, 2008. 

Compared with their white counterparts, African American and 

Latino borrowers were more than 30 percent more likely to receive 

a higher rate on many types of loans, even after accounting for differences in risk, according to a 2006 report from the Center for Responsible Lending, a research and policy nonprofit.78 As Wade Henderson, President and Chief Executive Officer of the Leadership 

Conference on Civil Rights, observed, ‘‘It has long been clear to our 

groups that America has a separate and unequal lending system, 

and that African American, Latino and other minority consumers 

disproportionately secure credit from an unscrupulous and unregulated lending market.’’ 79

Impact on Older Americans 

Although senior citizens have long been considered among the 

most frugal and resistant to incurring debt, changing economic conditions—particularly declining pension and investment income and 

rising costs for basic expenses such as prescription drugs, health 

care, and utilities—have made it difficult for many to make ends 

meet on fixed incomes. Some of these ‘‘cash-poor’’ but ‘‘equity-rich’’ 

seniors used the equity in their homes to help meet medical and 

living expenses, and in the process were targeted by unscrupulous 

subprime mortgage lenders. These unwary borrowers received 

subprime refinance loans with low initial teaser rates that were not 

properly underwritten. Now, as those teaser rates expire and are 

replaced with escalating higher rates, some seniors, including 

many who owned their homes outright just a few years ago, are 

now finding that they simply cannot afford to stay in their homes, 

and are facing the nightmare of foreclosure. 

Analysts at the American Association of Retired Persons (AARP) 

have found that ‘‘Americans age 50 and over represent about 28 

percent of all delinquencies and foreclosures in the current crisis.’’ 80 That translates into a full 684,000 Americans age 50 and 

over who were either delinquent or in foreclosure at the end of 

2007; about 50,000 were actually in foreclosure or had already lost 

their homes. The analysis concludes that ‘‘older Americans appear 

particularly vulnerable to house price declines and subprime 

loans.’’ 81

Having a subprime loan is associated with a higher delinquency 

and foreclosure rate among all age groups. Nevertheless, AARP 

states that the impact of subprime lending appears to be disproportionately harder on older Americans. Homeowners under age 50 

with subprime loans are 13 times more likely to be in foreclosure 

than those with prime loans. At age 50, the number jumps to 17 

times more likely to be in foreclosure.82

Why seniors fall into this debt trap is aptly explained in the following news report: 


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83 Joseph Huff-Hannon, Facing Foreclosure: Brooklyn Retiree on Verge of Losing Home as 

Subprime Lenders Target Cash-Poor Black Seniors, INDEPENDENT, Apr. 25, 2008, at http:// 

www.indypendent.org/2008/04/25/facing-foreclosure/ 84Susan Kelleher & Justin Mayo, Homeowners in Debt, Seniors Prime Targets of Riskiest 

Loans, SEATTLE TIMES, Dec. 17, 2007. 85 Id. 86 Id. 87Foreclosures Hit Older Americans; 28% of Affected Homeowners Are Age 50 and Up, Associated Press, Sept. 19, 2008 (quoting Susan Reinhard, Senior Vice President, Public Policy Institute). 88William Apgar, Joint Center for Housing Studies, Harvard University, presentation at 

AARP Forum, Sept. 19, 2008. 

‘‘All my clients tell the same story; it’s almost like a 

script,’’ said Donna Dougherty, a staff attorney with 

Queens Legal Services for the Elderly. Typically, a homeowner falls behind on taxes, a credit card bill or is hit with 

an unexpected medical bill. As a result, he or she ends up 

on a list of homeowners in debt or with a less than perfect 

credit score, but with substantial home equity. That’s 

when the phone calls begin. ‘‘When somebody calls out of 

the blue and says ‘We’ll help you so you don’t lose your 

home,’ it’s almost like a white knight showing up,’’ says 

Dougherty. ‘‘Seniors are absolutely one of the key targeted 

groups.’’ 83

An analysis of more than 4,000 loans by Ameriquest Mortgage 

conducted by the Seattle Times found that one in three borrowers 

in King County, Washington was aged 50 or older and one in seven 

was 60 or older when they took out a mortgage with the lender.84

Nearly all of the borrowers already owned their homes. As a case 

in point, the Seattle Times reported on a 93-year-old woman who 

‘‘took out a high-cost, high-interest mortgage against her home of 

more than four decades’’ that went into foreclosure within 

months.85 It also examined the case of a 79-year-old janitor, who 

obtained ten subprime refinancings over 9 years after the death of 

her husband. As a result of these refinancings, the homeowner’s 

mortgage debt swelled from $32,000 in 1998 to $382,000 in 2005.86

Although losing a home to foreclosure is a disaster no matter 

what the homeowner’s age is, it is an overwhelming catastrophe for 

older people. According to the Public Policy Institute, seniors ‘‘rely 

on their homes both for shelter and as a retirement asset,’’ and 

therefore ‘‘[l]osing a home jeopardizes long-term financial security, 

with limited time to recover.’’ 87 AARP reports that the problem of 

older households and foreclosures is likely to grow, as homeowners 

increasingly carry mortgage debt in their retirement years. In 

2007, 53 percent of all owners with a head of household age 50 or 

older had a mortgage, up from 34 percent just two decades ago.88

Impact on Renters 

Across the country, thousands of renters have become innocent 

victims of the foreclosure crisis. They have been forced to move because the owner of the property was in foreclosure. Security deposits have been lost, and lives turned upside-down, as people scramble to find a new place to live on short notice. 

Almost 15 million renters—40 percent of all renters nationwide— 

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89Doug Guthrie, Renters caught in foreclosure meltdown, DETROIT NEWS, Oct. 17, 2008. 90Letter from Coalition to Protect Renters in the Foreclosure Crisis to House Speaker Nancy 

Pelosi et al. (Oct. 21, 2008), at http://www.nlihc.org/doc/House-letter-on-renter-assistance-instimulus.pdf. 91Press Release, National Low Income Housing Coalition, Renters Make Up 45% of Households Whose Homes Are in Foreclosure in Four New England States (May 7, 2008), at http:// 

www.utahhousing.org/documents/NLIHC-Letterhead-templat-2008-good3.pdf. 92Steve Brandt & Warren Wolfe, Wave of Foreclosures Hits Renters, STAR TRIB.—MINNEAPOLIS-ST. PAUL, Oct. 29, 2007 (quoting Jane Stensen, Senior Director for Human Services, 

Catholic Charities USA). 93 Rick Green, Lehman Shuts Unit; Toll of Lenders Tops 100: Subprime Scorecard, 

Bloomberg.com, Sept. 18, 2007. 

cording to U.S. Census data.89 While there are no national figures 

on foreclosure-related evictions, these types of rental properties 

have been vulnerable to foreclosure because they tend to be owned 

by small investors. In most States, when a bank forecloses on a 

landlord, the tenant has no guarantee of being allowed to stay in 

the property. In addition, neither the lender nor the landlord has 

any legal obligation to inform the tenant of the foreclosure. As a 

result, it is common for the renter to first learn of the foreclosure 

when he or she is being told to vacate the property within a few 

days or weeks. 

Although the data are incomplete on the number of renters who 

are evicted due to foreclosure, the National Low Income Housing 

Coalition estimates that as many as 40 percent of the families who 

have or could lose their homes due to foreclosure are renters.90

These individuals are unlikely to get their security deposits returned, and they will also incur unforeseen expenses to relocate to 

new rental housing. And if they live paycheck to paycheck with no 

savings to rely on in emergencies, they are at high risk of joining 

the ranks of America’s homeless. 

As the Coalition explains, ‘‘Foreclosure usually means eviction 

for renters. Because renters as a group have lower incomes than 

homeowners and because most renters who are evicted due to foreclosure never get their security deposits back, they face a period of 

housing instability at the very least and many are at risk of homelessness.’’ 91 Catholic Charities USA, the Nation’s largest network 

of social services agencies, concurs. It notes, ‘‘Foreclosure is causing 

a significant increase in homelessness within our network all 

across the country.’’ 92

Impact on the Financial Marketplace—Both Here and Abroad 

Turmoil in the mortgage industry has had a domino effect on the 

financial marketplace and lending community generally. Since 

2006, at least 100 mortgage companies have halted operations or 

sought buyers.93 With respect to the financial marketplace, the 

Treasury Department’s Under Secretary for Domestic Finance, in 

testimony before the House Financial Services Committee, explained: 

The uncertainty regarding both the future prospects of 

these mortgage-backed securities and the methodologies 

the credit rating agencies used to rate these securities 

compelled investors to reassess the risk of these securities 

and subsequently reassess price. Given the uncertainty of 

the underlying credit and cash flows, few buyers were willing to risk their capital. Valuation became extremely difficult as a no-bid environment seized certain segments of 


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94Recent Events in the Credit and Mortgage Markets and Possible Implications for U.S. Consumers and the Global Economy: Hearing Before the H. Comm. on Financial Services, 110th 

Cong. (2007) (statement of Robert Steel, Treasury Department Under Secretary for Domestic Finance). 95 Id. 96 Eric Pfanner, British Mortgage Lender Is Offered Emergency Loan, N.Y. TIMES, Sept. 14, 

2007. 97Mark Jickling, Hedge Funds: Should They Be Regulated, Congressional Research Service 

Report for Congress, at 1 (July 2, 2007). Studies find that the mortality rate for hedge funds 

is about 20% per year and that the average life span is about 3 years. 98Mark Jickling & Alison A. Raab, Hedge Fund Failures, Congressional Research Service Report for Congress, summary (Aug. 1, 2007). Hedge funds are open to ‘‘accredited investors,’’ defined as those with over $1 million in assets. Id. 99 Id. 100 Nara Der Hovanesian & Matthew Goldstein, The Mortgage Mess Spreads, BUSINESS WEEK, Mar. 7, 2007. 101See, e.g., Bear Stearns Hedge Funds File for Bankruptcy, Associated Press, Aug. 1, 2007; 

Alex Markels, Taking Credit’s Temperature—Risky Home Lonas Run a Fever, and the Market 

Prays It Doesn’t Spread, U.S. NEWS & WORLD REPORT, July 23/30, 2007, at 37 (‘‘Several hedge 

funds, which used hundreds of millions of dollars in investor capital to borrow billions more for 

big bets on subprime-backed debt, have been shut down or needed bailing out.’’). For example, 

two Bear Stearns hedge funds heavily invested in bonds backed by home loans recently collapsed and filed for bankruptcy protection on July 31, 2007 under chapter 15 of the Bankruptcy 

Code. Bear Stearns Hedge Funds File for Bankruptcy, Associated Press, Aug. 1, 2007. The funds 

filed for chapter 15 (which pertains to transnational insolvencies) because they are registered 

in the Cayman Islands. Id. 

the market. This reappraisal has spread across the credit 

market spectrum, first affecting residential-mortgage 

backed securities and then spreading to other asset classes, and, particularly, securitized products. Spreads have 

widened and a lack of liquidity has affected these other 

asset classes. The financing of buy-out transactions has 

been challenged as higher risk premia resurfaced after a 

long period of favorable conditions. Volatility has increased, from Treasury bills to the stock markets. 

In early August [2007], this uncertainty began to spread 

to the asset-backed commercial paper market, typically a 

very liquid market. . . . Subsequently, banks became increasingly concerned about their own liquidity in view of 

the possibility that they might have to provide backup for 

commercial paper and take other assets onto their balance 

sheets. In response to such developments, the Federal Reserve took several measures to increase liquidity and promote the orderly functioning of financial markets.94

These measures included making additional reserves available to 

the Nation’s banking system and lowering the interest discount 

rate, among other actions.95 The mortgage crisis has had international ramifications and has been blamed for causing ‘‘a global 

credit crunch.’’ 96

Hedge funds pool invested money to buy and sell stocks, bonds, 

and many other assets, with the prospect of yielding high returns, 

but based on risky investment strategies.97 Hedge fund investment 

is limited by law to the very wealthy ‘‘who are presumed to be capable of understanding the risks and bearing the losses of financial 

speculation.’’ 98 Attracted by high returns, institutional investors, 

such as pension funds and university endowments, are placing 

more of their money in hedge funds.99 And as hedge funds invested 

in the risky subprime mortgage market,100 some high-profile funds 

incurred major losses, and several have filed for bankruptcy.101 As 


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102Mark Jickling & Alison A. Raab, Hedge Fund Failures, Congressional Research Service Report for Congress, summary (Aug. 1, 2007). Hedge funds are open to ‘‘accredited investors,’’ defined as those with over $1 million in assets. Id. 103Mara Der Hovanesian, The Home Equity Crisis Ahead—Even Banks that Dodged the 

Subprime Bullet Face Losses from Loans Based on Homes Now at Risk, BUSINESSWEEK, Jan. 

16, 2008. 104 Id.; see, e.g., Marc Labonte, Would a Housing Crash Cause a Recession?, Congressional Research Report for Congress, RL34244 (Nov. 7, 2007). 105Legislative and Regulatory Options for Minimizing and Mitigating Mortgage Foreclosures: 

Hearing Before the H. Comm. on Financial Services, 110th Cong. (2007) (prepared testimony 

submitted by the National Association of Home Builders). 106 Id. 107Terry Pristin, Shopping Centers Begin to Feel Ripples of Housing’s Ills, N.Y. TIMES, Sept. 

12, 2007, at C6. 108 Brian Louis, Paulson Mortgage Plan Surfaces Too Late to Stem Housing Slide, 

Bloomberg.com (Dec. 7, 2007) (quoting Nicolas Retsinas, Director of Harvard University’s Joint 

Center for Housing Studies). 109 Id. (citing Mark Zandi, Chief Economist, Moody’s Economy.com). 

a result, ‘‘rank-and-file workers, retirees, and others may be unwittingly exposed to hedge fund losses.’’ 102 Thus, the mortgage crisis 

not only has had ripple effects throughout financial markets, but 

it has also undermined the economic security of many workingclass Americans. 

Impact on Secondary Mortgages and Other Industries 

Still others are concerned about the spillover effects of the foreclosure crisis into other areas.103 As BusinessWeek explained: 

What’s more, there’s little that can be done to prevent the pain from the deterioration of this $850 billion market. 

A lender on a mortgage has the first claim on the underlying property. In the case of foreclosure, it can sell the 

property and recoup some money. The bank with the 

home-equity piece has no such collateral and is usually out 

the money. ‘‘The home-equity lender is going to get hosed,’’ 

says Amy Crews Cutts, deputy chief economist at mortgage giant Freddie Mac[.] 104

Various industries involved in the housing market have been adversely affected. Last November, pending home sales in the United 

States ‘‘fell to the lowest level on record,’’ according to the National 

Association of Home Builders.105 At a 2007 hearing before the 

House Financial Services Committee, the Association testified that 

its ‘‘members and their customers have been significantly impacted 

by the mortgage upheaval and there is deep concern that the dislocations in the financing markets will increase the depth and 

length of the housing downturn.’’ 106 In addition, ‘‘many people in 

the retail real estate industry are bracing themselves for a slowdown in spending as the subprime mortgage crisis and the decline 

in housing values continue to send ripples through the economy.’’ 107

Some assert that the ‘‘fundamental problem with housing is oversupply.’’ 108 Economist Mark Zandi correctly predicted in 2007 that 

even if interest rates were frozen on one fifth of 2006 subprime 

loans resetting in 2008, existing home prices could fall by as much 

as 15 percent.109 Others cite Americans’ pessimism itself as the 

cause. As the Chief Executive Officer of Toll Brothers, Inc., the Nation’s largest luxury home builder, explained, ‘‘Right now I think 

it takes a brave soul to buy a home because there’s so much chatter 

about housing prices dropping. . . . As soon as that fear leaves the 

market and we have some kind of equilibrium, we’ll be back on 


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110 Id. (quoting Robert Toll, Chief Executive Officer, Toll Brothers, Inc.). The article also noted 

that Toll Brothers, Inc. has ‘‘lost about $5 billion of market value since July 2005, when new 

home sales peaked in the U.S.’’ Id. 111See, e.g., Editorial, Show Us the Mortgage Relief, N.Y. TIMES, Dec. 9, 2007. 112Op. Ed., Paul Krugman, Henry Paulson’s Priorities, N.Y. TIMES, Dec. 10, 2007. 113 Edmund Andrews, Relief for Homeowners is Given to a Relative Few, N.Y. TIMES, Mar. 4, 

2008 (loans originated in 2005 and 2006). 114Kristopher Gerardi et al., Subprime Outcomes: Risky Mortgages, Homeownership Experiences, and Foreclosures, Federal Reserve Bank of Boston Working Papers, No 07–15 (Dec. 3, 

2007) at 3–4. 115See also Edmund L. Andrews, Fed Chief Urges Breaks for Some Home Borrowers, N.Y. 

TIMES, Mar. 4, 2008; John Brinsley, Bernanke Call for Mortgage Forgiveness Puts Pressure on 

Paulson, Bloomberg.com (Mar. 5, 2008); Phil Izzo, Housing Market Has Further to Fall, WALL

ST. J., Mar. 13, 2008 (‘‘Last week, Federal Reserve Chairman Ben Bernanke suggested that 

lenders could aid struggling homeowners by reducing their principal—the sum of money they 

borrowed—to lessen the likelihood of foreclosure. Some 71% of respondents [i.e., economists surveyed by the New York Times] agreed with the suggestion. ’’). 116 Ben S. Bernanke, Chairman, Federal Reserve, Speech at the Independent Community 

Bankers of America Annual Convention (Mar. 4, 2008). 117 Press Release, Office of the White House, Aug. 31, 2007. See also the Interagency Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages, at http:// 

www.federalreserve.gov/newsevents/press/bcreg/20070904a.htm (encouraging lenders to address 

subprime hybrid ARM resets by pursuing ‘‘appropriate loss mitigation strategies designed to 

preserve homeownership. . . . Appropriate loss mitigation strategies may include, for example, 

loan modifications, deferral of payments, or a reduction of principal.’’). 

top.’’ 110 Still others blame the complexity of the securitization process and the reluctance of mortgage servicers (entities that collect 

mortgage payments on behalf of investors) to enter into loan modifications because they fear being sued by mortgage investors.111

Some critics questioned whether the Paulson Plan was ‘‘intended to 

achieve real results.’’ 112

NEED FOR THE LEGISLATION

Responses to the Mortgage Foreclosure Crisis Have Been Inadequate 

To Date 

Overview 

As of 2008, 30 percent of families holding recent subprime mortgages owed more on their mortgage than their home was worth.113

These families are at an increased risk of foreclosure because ‘‘negative equity’’ precludes the homeowner from selling, refinancing, or 

getting a home equity loan or other mechanism for weathering 

short-term financial difficulty.114

Regulators and economists are increasingly cautioning that loan 

balances must be reduced to avoid unnecessary foreclosures that 

will further damage the economy.115 Federal Reserve Chairman 

Ben Bernanke observed in March 2008: 

[T]he current housing difficulties differ from those in the 

past, largely because of the pervasiveness of negative equity positions. With low or negative equity, as I have mentioned, a stressed borrower has less ability (because there 

is no home equity to tap) and less financial incentive to try 

to remain in the home. In this environment, principal reductions that restore some equity for the homeowner may 

be a relatively more effective means of avoiding delinquency and foreclosure.116

Notwithstanding industry leaders’ public endorsements of these 

principles, support for loan modifications from the Bush Administration,117 exhortations by Federal banking agencies and the ConVerDate Nov 24 2008 01:37 Feb 25, 2009 Jkt 079006 PO 00000 Frm 00019 Fmt 6659 Sfmt 6601 E:\HR\OC\HR019.XXX HR019

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118Statement on Loss Mitigation Strategies for Servicers of Residential Mortgages http:// 

www.federalreserve.gov/boarddocs/srletters/2007/SR0716.htm. 119Dina ElBoghdady, HUD Chief Calls Aid on Mortgages a Failure, +WASH. POST, Dec. 17, 

2008, at A1. 120 Alan M. White, Abstract, Rewriting Contracts, Wholesale: Data on Voluntary Mortgage 

Modifications from 2007 and 2008 Remittance Reports (Aug. 2008), at http://papers.ssrn.com/ 

sol3/papers.cfm?abstractlid=1259538 121 Id. 122 Id. 123 Id. 124State Foreclosure Prevention Working Group Reports, Analysis of Subprime Mortgage 

Servicing Performance, Data Report No. 3, Sept. 2008, at http://www.csbs.org/Content/ 

NavigationMenu/Home/SFPWGReport3.pdf. 125 Rod Dubitsky et al., Subprime Loan Modifications Update, Credit Suisse Fixed Income Research (Oct. 1, 2008) at 2. 126David Cho & Renae Merle, Merits of New Mortgage Aid Are Debate—Critics Say Treasury 

Plan Won’t Bring Long-Term Relief, WASH. POST, Mar. 4, 2008 (citing remarks of Bill 

ference of State Banking Supervisors,118 and voluntary efforts by 

lenders and servicers have resulted in a minimal number of viable 

loan modifications. In December 2008, Secretary of Housing and 

Urban Development Steve Preston acknowledged that the ‘‘centerpiece of the Federal Government’s effort to help struggling homeowners has been a failure.’’ 119 The problems are two-fold: too few 

people are in foreclosure prevention programs; and of those who 

are being reached for loan modifications, too few are getting sustainable new terms. 

An empirical study released in August 2008 examined negotiated 

mortgage modifications based on data compiled from monthly 

servicer remittance reports from July 2007 through June 2008, 

found ‘‘that while the number of modifications rose rapidly during 

the crisis, mortgage modifications in the aggregate are not reducing 

subprime mortgage debt.’’ 120 Of even greater significance, the 

study found that these modifications ‘‘rarely if ever reduced principal debt, and in many cases increased the debt.’’ 121 In addition, 

‘‘many modifications actually increased the monthly payment.’’ 122

As Sheila Bair, Chair of the Federal Deposit Insurance Corporation, remarked, ‘‘Why there’s been such a political focus on making 

sure we’re not unduly helping borrowers but then we’re providing 

all this massive assistance at the institutional level, I don’t understanding it. . . . It’s been a frustration for me.’’ 123

Last fall, the State Foreclosure Prevention Working Group, comprised of State attorneys general and State banking regulators, 

issued its third in a series of reports looking at the state of foreclosures in this country. Key findings include the following: (1) 

nearly eight out of ten seriously delinquent homeowners are not on 

track for any loss mitigation outcome, down from seven in ten in 

previous reports; (2) new efforts to prevent foreclosures are on the 

decline, despite a temporary increase in loan modifications through 

the second quarter of 2008; and (3) one out of five loan modifications made in the past year is currently delinquent.124

Of the various types of modifications that lenders have provided, 

the second largest category of modification actually increased the 

homeowner’s monthly mortgage payments.125 These figures include 

modifications done by the Hope Now Alliance, the program convened by the Treasury Department to encourage loan modification. 

As acknowledged by the vice chair of Washington Mutual, who 

helped run the program, many of the homeowners who have sought 

assistance from Hope Now ‘‘will not receive long-term relief and 

could ultimately face higher total costs.’’ 126 Chairman Bernanke 


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Longbrake, senior policy adviser for the Financial Services Roundtable and vice chair of Washington Mutual). 127 Ben S. Bernanke, Chairman, Federal Reserve, Speech at the Independent Community 

Bankers of America Annual Convention (Mar. 4, 2008). 128Kate Berry, Early Read Finds Many Loan Mods Falling Short, AM. BANKER, Nov. 24, 2008. 129 Alan White, Rewriting Contracts, Wholesale: Data on Voluntary Mortgage Modifications 

From 2007 and 2008 Remittance Reports, at http://ssrn.com/abstract=1259538; Alan M. White, 

Deleveraging the American Homeowner: The Failure of 2008 Voluntary Mortgage Contract Modifications, ll CONN. L. REV. ll (forthcoming 2009) (reporting on updated data) 130 Inside Mortgage Finance Reprints, Subprime Debt Outstanding Falls, Servicers Pushed on 

Loan Mods (Nov. 16, 2007) (quoting Karen Weaver, a managing director and global head of 

securitization research at Deutsche Bank Securities). 131Michelle J. White, Bankruptcy: Past Puzzles, Recent Reforms, and the Mortgage, National 

Bureau of Economic Research Working Paper No. 14549, at 14–15 (Dec. 2008); see also Alan 

M. White, Deleveraging the American Homeowner: The Failure of 2008 Voluntary Mortgage Contract Modifications, ll CONN. L. REV. ll (2009) (forthcoming) (‘‘No single servicer or group 

of servicers, however, has any economic incentive to organize a pause in foreclosures or an organized deleveraging program to benefit the group.’’). 132 Credit Suisse, Mortgage Liquidity du Jour: Underestimated No More, at 5 (Mar. 12, 2007). 

noted that loan modifications involving ‘‘reductions of principal balance have been quite rare.’’ 127

Professor Alan White of Valparaiso University School of Law examined the modifications that are taking place and concluded that 

‘‘we are going backwards’’ and that ‘‘voluntary modifications are 

putting people underwater more than they already are[.]’’ 128 The 

result is that there is a high level of defaults after a modification. 

Specifically, Professor White found that less than 10 percent of the 

time do the voluntary programs result in a reduced principal loan 

balance, with more than half of modifications capitalizing unpaid 

interest and fees into larger and more drawn-out debt on the back 

end of the mortgage ; and only about a third of voluntary mortgage 

modifications reduce monthly payment burdens for homeowners, 

with nearly half actually saddling distressed homeowners with increased payments under the modifications.129

There are a number of reasons why voluntary loss mitigation 

cannot keep up with demand. One reason is that the way servicers 

are compensated by lenders often creates a bias for moving forward 

with foreclosure rather than engaging in foreclosure prevention. As 

reported in Inside B&C Lending, ‘‘Servicers are generally disincented to do loan modifications because they don’t get paid for 

them but they do get paid for foreclosures.’’ 130 So even when a loan 

modification would better serve investors and homeowners, some 

loan servicers have an undue economic incentive to proceed to foreclosure. As one expert explained: 

One problem is that servicers are compensated for their 

costs of foreclosing, but not for their costs of renegotiating. 

Another problem is that servicers impose fees when debtors pay late or default, and the servicing contracts allow 

them to keep the fees if they can be collected. Since renegotiating a mortgage often involves giving up these fees, 

they give servicers an additional incentive to foreclose 

rather than negotiate. Thus most mortgage servicing contracts are unsuited to dealing with the housing crisis.131

Even when servicers do want to engage in effective loss mitigation, they face other structural obstacles. One major obstacle is the 

number of homes that have more than one mortgage or lien against 

them. Between one-third and one-half of the homes purchased in 

2006 with subprime mortgages have second mortgages,132 and 


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133 Jody Shenn, ‘Piggyback’ Mortgages May Cut Modifications, Fed Says, Bloomberg.com (Dec. 

30, 2008) (reporting on Federal Reserve study that attempts ‘‘to loosen terms on hundreds of 

thousands of delinquent home loans may be hindered by so-called piggyback second mortgages 

that gained popularity during the U.S. housing boom’’). 134Michelle J. White, Bankruptcy: Past Puzzles, Recent Reforms, and the Mortgage, National 

Bureau of Economic Research Working Paper No. 14549, at 15 (Dec. 2008). 135 Ivy Zelman et al., Credit Suisse, Subprime Loan Modifications Update, at 8 (Oct. 1, 2008). 136See Credit Suisse, The Day After Tomorrow: Payment Shock and Loan Modifications (Apr. 

5, 2007) (noting specific examples of PSAs with various modification restrictions, including 5% 

by balance, 5% by loan count, limits on frequency, and limits on interest rate). 137 Ben S. Bernanke, Chairman, Federal Reserve, Remarks to the Independent Community 

Bankers of American Annual Conference (Mar. 4, 2008). 

many other homeowners have open home equity lines of credit secured by their home. The holder of the first mortgage will generally 

not want to provide modifications that would simply free up the 

homeowner’s resources to make payments on a formerly worthless 

junior lien, nor to modify a loan where there is a second mortgage 

in default.133 Second mortgage holders ‘‘have the right to prevent 

refinancing or renegotiation of first mortgages unless the second 

mortgage is paid off.’’ 134 As Credit Suisse reports, ‘‘It is often difficult, if not impossible, to force a second-lien holder to take the 

pain prior to a first-lien holder when it comes to modifications,’’ 

thereby dooming the effort.135

Another structural obstacle is posed by securitization. When 

servicing securitized loans, servicers are bound by the terms of the 

agreement with investors, known as a ‘‘pooling and servicing agreement’’ (PSA), which may limit what they can do by way of modification. For example, some PSAs limit the number or percentage of 

loans in a pool that can be modified.136 Moreover, even if the PSA 

is not a problem, most modifications will have differing impacts on 

different groups of investors; for example, a change in interest rate 

may impact different investors than a waiver of a prepayment penalty. Servicers may decline to enter into a modification out of fear 

of an investor lawsuit. As Federal Reserve Chairman Ben 

Bernanke explained: 

Unfortunately, even though workouts may often be the 

best economic alternative, mortgage securitization and the 

constraints faced by servicers may make such workouts 

less likely. For example, trusts vary in the type and scope 

of modifications that are explicitly permitted, and these 

differences raise operational compliance costs and litigation risks. Thus, servicers may not pursue workout options 

that are in the collective interests of investors and borrowers. Some progress has been made (for example, 

through clarification of accounting rules) in reducing the 

disincentive for servicers to undertake economically sensible workouts. However, the barriers to, and disincentives 

for, workouts by servicers remain serious problems that 

need to part of current discussions about how to reduce 

preventable foreclosures.137

The necessity of government action also is gaining recognition 

among Wall Street leaders. A senior economic advisor at UBS Investment Bank has observed that ‘‘when markets fail, lenders and 

borrowers need some sort of regulatory and legislative framework 

within which to manage problems, rather than be forced to act in 


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138George Magnus, Large-scale Action Is Needed To Tackle the Credit Crisis, FINANCIAL

TIMES, Apr. 8, 2008. 139 Alan S. Blinder, From the New Deal, a Way Out of a Mess, N.Y. TIMES (Feb. 24, 2008). 140Steve Lohr, Loan by Loan, the Making of a Credit Squeeze, N.Y. TIMES, Aug. 19, 2007, at 

1 Bus. Sec. 141 11 U.S.C. § 362(a) (2008). 142 11 U.S.C. § 362(d) (2008). Typically, the basis for granting relief from the automatic stay 

is that the mortgagee lacks ‘‘adequate protection.’’ 11 U.S.C. §§ 361, 362(d)(1) (2008). 143 Chapter 13 is a form of bankruptcy relief by which a debtor, in exchange for retaining possession of his or her assets, proposes a repayment plan pursuant to which the debtor devotes 

all of his or her disposable income for a period of up to 5 years. Creditors in a chapter 13 case 

must receive under the plan at least as much as they would receive if the case was converted 

to chapter 7 for liquidation. 144 11 U.S.C. § 1322(b)(5) (2008). 145 As a result of an amendment to the bankruptcy law in 2005, a purchase money security 

interest in a motor vehicle acquired for the debtor’s personal use may not be bifurcated if the 

debt was incurred during the 910-day period preceding the bankruptcy filing. The same prohibition applies to a claim secured by anything else of value if the debtor incurred the debt within 

1 year of the bankruptcy filing. 11 U.S.C. § 1325(a) (2008). 

the chaos of the moment.’’ 138 Moreover, as former Federal Reserve 

Board Vice Chairman Alan Blinder recently noted, the fact that 

most of the mortgages at issue have been securitized and sold to 

investors across the globe ‘‘bolsters the case for government intervention rather than undermining it. After all, how do you renegotiate terms of a mortgage when the borrower and the lender don’t 

even know each other’s names?’’ 139

Judicial Modification of Mortgages 

A mechanism for enabling a court to break the deadlock and provide an economically rational solution that avoids foreclosure and 

nets the lender at least as much as would be recovered through a 

foreclosure sale is needed. 

Current Bankruptcy Law 

While the fallout from the subprime mortgage ‘‘extends from 

hedge fund managers to rank-and-file investors,’’ the ‘‘most personally punishing setback is a family losing its home.’’ 140 In an effort 

to forestall a foreclosure sale, a borrower may resort to filing for 

bankruptcy relief, which stays most creditor collection attempts, including foreclosure sales, at least for a period of time.141 Such protection—known as the automatic stay—is limited, however. If the 

debtor does not cure the default leading to the foreclosure, i.e., pay 

the arrearages due under the mortgage, and remain current on all 

future payments, the mortgage lender can obtain a court order terminating the automatic stay and thereby allow the foreclosure sale 

to proceed.142

For most consumers facing a foreclosure sale who want to retain 

their homes, chapter 13 of the Bankruptcy Code 143 provides some 

modicum of protection. In the context of a chapter 13 repayment 

plan, a debtor may cure a default under a mortgage ‘‘within a reasonable time,’’ providing the debtor remains current on his or her 

post-petition mortgage payments.144 While this ability to cure a default under a residential mortgage is valuable, chapter 13 does not 

protect a consumer debtor from having to pay escalating interest 

costs and hidden fees that are often involved in subprime mortgage 

agreements. 

It should be noted that, while a chapter 13 debtor may modify 

the rights of most other types of secured or unsecured creditors in 

the context of a chapter 13 repayment plan,145 the current law exVerDate Nov 24 2008 01:37 Feb 25, 2009 Jkt 079006 PO 00000 Frm 00023 Fmt 6659 Sfmt 6601 E:\HR\OC\HR019.XXX HR019

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146 11 U.S.C. § 1322(b)(2) (2008). 147 Nobelman v. American Sav. Bank, 508 U.S. 324 (1993). 

pressly prohibits a chapter 13 debtor from modifying the rights of 

a creditor secured ‘‘only by a security interest in real property that 

is the debtor’s principal residence.’’ 146 Not only does this treat 

principal residences less favorably than second homes, vacation 

homes, and other properties. Curiously, if the mortgage lender also 

has a security interest in other property of the debtor—so that the 

debt is not secured only by a security interest in the debtor’s principal residence—the prohibition on modifying the mortgage terms 

does not apply. 

The Supreme Court has held that this exception to a chapter 13’s 

ability to modify the rights of creditors applies even if the mortgagee is undersecured.147 Thus, if a chapter 13 debtor owes $300,000 on a mortgage for a home that is worth less than 

$200,000, he or she must repay the entire amount in order to keep 

his or her home, even though the maximum that the mortgage 

lender would receive upon foreclosure is the home’s value—i.e., 

$200,000—less the costs of foreclosure. 

HEARINGS

The Committee on the Judiciary held 1 day of hearings on H.R. 

200, the ‘‘Helping Families Save Their Homes in Bankruptcy Act 

of 2009,’’ and H.R. 225, the ‘‘Emergency Homeownership and Equity Protection Act,’’ on January 22, 2009. Testimony was received 

from Representative Brad Miller (D-NC); Representative Jim Marshall (D-GA); David M. Certner, Legislative Policy Director, American Association of Retired Persons; Adam J. Levitin, Associate 

Professor of Law, Georgetown University Law Center; Christopher 

J. Mayer, Senior Vice Dean, Columbia Business School; and Matthew Mason, Esq., Assistant Director, UAW-GM Legal Services 

Plan. 

COMMITTEE CONSIDERATION

On January 27, 2009, the Committee met in open session and ordered the bill, H.R. 200 favorably reported with an amendment, by 

a rollcall vote of 21 to 15, a quorum being present. 

COMMITTEE VOTES

In compliance with clause 3(b) of rule XIII of the Rules of the 

House of Representatives, the Committee advises that the following 

rollcall votes occurred during the Committee’s consideration of H.R. 

200. 

1. An amendment by Mr. Smith: (1) specifying that a claim for 

a loan secured by a security interest in the debtor’s principal residence may be modified in certain specified respects to the extent 

necessary so that the monthly mortgage payment is not less than 

31 percent and not more than 38 percent of the debtor’s current 

monthly income; and (2) providing that if the claim has been modified to an amount below the original principal of the loan pursuant 

to section 1322(b)(11)(A) and the residence is sold, transferred or 

refinanced during the term of the plan, the plan requires the debtor to enter into an enforceable agreement with the holder that it 


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is entitled to receive, in addition to the unpaid portion of the allowed secured claim, the net proceeds of the sale or the amount of 

the allowed unsecured claim, whichever is less. Defeated 14 to 20. 

ROLLCALL NO. 1 

Ayes Nays Present 

Mr. Conyers, Jr., Chairman ............................................................................... X 

Mr. Berman .......................................................................................................

Mr. Boucher .......................................................................................................

Mr. Nadler ......................................................................................................... X 

Mr. Scott ........................................................................................................... X 

Mr. Watt ............................................................................................................ X 

Ms. Lofgren ....................................................................................................... X 

Ms. Jackson Lee ................................................................................................ X 

Ms. Waters ........................................................................................................ X 

Mr. Delahunt ..................................................................................................... X 

Mr. Wexler ......................................................................................................... X 

Mr. Cohen .......................................................................................................... X 

Mr. Johnson ....................................................................................................... X 

Mr. Pierluisi ....................................................................................................... X 

Mr. Gutierrez ..................................................................................................... X 

Mr. Sherman .....................................................................................................

Ms. Baldwin ...................................................................................................... X 

Mr. Gonzalez ...................................................................................................... X 

Mr. Weiner ......................................................................................................... X 

Mr. Schiff .......................................................................................................... X 

Ms. Sa ́nchez ...................................................................................................... X 

Ms. Wasserman Schultz .................................................................................... X 

Mr. Maffei ......................................................................................................... X 

[Vacant].

Mr. Smith, Ranking Member ............................................................................. X 

Mr. Goodlatte .................................................................................................... X 

Mr. Sensenbrenner, Jr. ...................................................................................... X 

Mr. Coble ........................................................................................................... X 

Mr. Gallegly ....................................................................................................... X 

Mr. Lungren ....................................................................................................... X 

Mr. Issa ............................................................................................................. X 

Mr. Forbes .........................................................................................................

Mr. King ............................................................................................................ X 

Mr. Franks ......................................................................................................... X 

Mr. Gohmert ...................................................................................................... X 

Mr. Jordan ......................................................................................................... X 

Mr. Poe .............................................................................................................. X 

Mr. Chaffetz ...................................................................................................... X 

Mr. Rooney ........................................................................................................

Mr. Harper ......................................................................................................... X 

Total ................................................................................................ 14 20 

2. An amendment by Mr. Franks limiting the legislation to: (1) 

mortgages originated in the period beginning January 1, 2004 

through December 31, 2007 and (2) to cases commenced in the 3- 

year period beginning on the Act’s date of enactment. Defeated 15 

to 20. 

ROLLCALL NO. 2 

Ayes Nays Present 

Mr. Conyers, Jr., Chairman ............................................................................... X 

Mr. Berman ....................................................................................................... X 

Mr. Boucher .......................................................................................................

Mr. Nadler ......................................................................................................... X 

Mr. Scott ........................................................................................................... X 

Mr. Watt ............................................................................................................ X 


wwoods2 on PROD1PC60 with REPORTS
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ROLLCALL NO. 2—Continued 

Ayes Nays Present 

Ms. Lofgren ....................................................................................................... X 

Ms. Jackson Lee ................................................................................................ X 

Ms. Waters ........................................................................................................

Mr. Delahunt ..................................................................................................... X 

Mr. Wexler ......................................................................................................... X 

Mr. Cohen .......................................................................................................... X 

Mr. Johnson ....................................................................................................... X 

Mr. Pierluisi ....................................................................................................... X 

Mr. Gutierrez ..................................................................................................... X 

Mr. Sherman ..................................................................................................... X 

Ms. Baldwin ...................................................................................................... X 

Mr. Gonzalez ...................................................................................................... X 

Mr. Weiner ......................................................................................................... X 

Mr. Schiff .......................................................................................................... X 

Ms. Sa ́nchez ...................................................................................................... X 

Ms. Wasserman Schultz .................................................................................... X 

Mr. Maffei .........................................................................................................

[Vacant].

Mr. Smith, Ranking Member ............................................................................. X 

Mr. Goodlatte .................................................................................................... X 

Mr. Sensenbrenner, Jr. ...................................................................................... X 

Mr. Coble ........................................................................................................... X 

Mr. Gallegly ....................................................................................................... X 

Mr. Lungren ....................................................................................................... X 

Mr. Issa ............................................................................................................. X 

Mr. Forbes ......................................................................................................... X 

Mr. King ............................................................................................................ X 

Mr. Franks ......................................................................................................... X 

Mr. Gohmert ...................................................................................................... X 

Mr. Jordan ......................................................................................................... X 

Mr. Poe .............................................................................................................. X 

Mr. Chaffetz ...................................................................................................... X 

Mr. Rooney ........................................................................................................

Mr. Harper ......................................................................................................... X 

Total ................................................................................................ 15 20 

3. An amendment by Mr. Forbes: (1) deleting the exception to 

the mandatory pre-filing credit counseling requirement in the 

Amendment in the Nature of a Substitute; and (2) requiring the 

court to find, as a condition of confirmation, that the debtor did not 

obtain the extension, renewal, or refinancing of credit that gives 

rise to a modified claim by misrepresentation, false pretenses, or 

actual fraud. Defeated 12 to 20. 

ROLLCALL NO. 3 

Ayes Nays Present 

Mr. Conyers, Jr., Chairman ............................................................................... X 

Mr. Berman ....................................................................................................... X 

Mr. Boucher .......................................................................................................

Mr. Nadler ......................................................................................................... X 

Mr. Scott ........................................................................................................... X 

Mr. Watt ............................................................................................................

Ms. Lofgren ....................................................................................................... X 

Ms. Jackson Lee ................................................................................................ X 

Ms. Waters ........................................................................................................

Mr. Delahunt ..................................................................................................... X 

Mr. Wexler ......................................................................................................... X 

Mr. Cohen .......................................................................................................... X 

Mr. Johnson ....................................................................................................... X 

Mr. Pierluisi ....................................................................................................... X 


wwoods2 on PROD1PC60 with REPORTS
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ROLLCALL NO. 3—Continued 

Ayes Nays Present 

Mr. Gutierrez ..................................................................................................... X 

Mr. Sherman ..................................................................................................... X 

Ms. Baldwin ...................................................................................................... X 

Mr. Gonzalez ...................................................................................................... X 

Mr. Weiner ......................................................................................................... X 

Mr. Schiff .......................................................................................................... X 

Ms. Sa ́nchez ...................................................................................................... X 

Ms. Wasserman Schultz .................................................................................... X 

Mr. Maffei ......................................................................................................... X 

[Vacant].

Mr. Smith, Ranking Member ............................................................................. X 

Mr. Goodlatte .................................................................................................... X 

Mr. Sensenbrenner, Jr. ......................................................................................

Mr. Coble ...........................................................................................................

Mr. Gallegly ....................................................................................................... X 

Mr. Lungren ....................................................................................................... X 

Mr. Issa ............................................................................................................. X 

Mr. Forbes ......................................................................................................... X 

Mr. King ............................................................................................................ X 

Mr. Franks .........................................................................................................

Mr. Gohmert ...................................................................................................... X 

Mr. Jordan ......................................................................................................... X 

Mr. Poe .............................................................................................................. X 

Mr. Chaffetz ...................................................................................................... X 

Mr. Rooney ........................................................................................................

Mr. Harper ......................................................................................................... X 

Total ................................................................................................ 12 20 

4. An amendment by Mr. King requiring the court to find, as a 

condition of confirmation, that the debtor did not obtain the extension, renewal, or refinancing of credit that gives rise to a modified 

claim by the debtor’s material misrepresentation, false pretenses, 

or actual fraud. Approved 21 to 3. 

ROLLCALL NO. 4 

Ayes Nays Present 

Mr. Conyers, Jr., Chairman ............................................................................... X 

Mr. Berman ....................................................................................................... X 

Mr. Boucher .......................................................................................................

Mr. Nadler .........................................................................................................

Mr. Scott ........................................................................................................... X 

Mr. Watt ............................................................................................................

Ms. Lofgren ....................................................................................................... X 

Ms. Jackson Lee ................................................................................................

Ms. Waters ........................................................................................................

Mr. Delahunt ..................................................................................................... X 

Mr. Wexler ......................................................................................................... X 

Mr. Cohen .......................................................................................................... X 

Mr. Johnson ....................................................................................................... X 

Mr. Pierluisi ....................................................................................................... X 

Mr. Gutierrez .....................................................................................................

Mr. Sherman .....................................................................................................

Ms. Baldwin ...................................................................................................... X 

Mr. Gonzalez ...................................................................................................... X 

Mr. Weiner ......................................................................................................... X 

Mr. Schiff .......................................................................................................... X 

Ms. Sa ́nchez ......................................................................................................

Ms. Wasserman Schultz .................................................................................... X 

Mr. Maffei ......................................................................................................... X 

[Vacant].


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28 

ROLLCALL NO. 4—Continued 

Ayes Nays Present 

Mr. Smith, Ranking Member ............................................................................. X 

Mr. Goodlatte .................................................................................................... X 

Mr. Sensenbrenner, Jr. ......................................................................................

Mr. Coble ...........................................................................................................

Mr. Gallegly .......................................................................................................

Mr. Lungren .......................................................................................................

Mr. Issa .............................................................................................................

Mr. Forbes ......................................................................................................... X 

Mr. King ............................................................................................................ X 

Mr. Franks .........................................................................................................

Mr. Gohmert ......................................................................................................

Mr. Jordan ......................................................................................................... X 

Mr. Poe .............................................................................................................. X 

Mr. Chaffetz ...................................................................................................... X 

Mr. Rooney ........................................................................................................ X 

Mr. Harper ......................................................................................................... X 

Total ................................................................................................ 21 3 

5. An amendment by Mr. Jordan revising the legislation to apply 

to nontraditional and subprime mortgages, as defined in the 

amendment. Defeated 14 to 20. 

ROLLCALL NO. 5 

Ayes Nays Present 

Mr. Conyers, Jr., Chairman ............................................................................... X 

Mr. Berman ....................................................................................................... X 

Mr. Boucher .......................................................................................................

Mr. Nadler .........................................................................................................

Mr. Scott ........................................................................................................... X 

Mr. Watt ............................................................................................................

Ms. Lofgren ....................................................................................................... X 

Ms. Jackson Lee ................................................................................................ X 

Ms. Waters ........................................................................................................ X 

Mr. Delahunt ..................................................................................................... X 

Mr. Wexler ......................................................................................................... X 

Mr. Cohen .......................................................................................................... X 

Mr. Johnson ....................................................................................................... X 

Mr. Pierluisi ....................................................................................................... X 

Mr. Gutierrez ..................................................................................................... X 

Mr. Sherman ..................................................................................................... X 

Ms. Baldwin ...................................................................................................... X 

Mr. Gonzalez ...................................................................................................... X 

Mr. Weiner ......................................................................................................... X 

Mr. Schiff .......................................................................................................... X 

Ms. Sa ́nchez ...................................................................................................... X 

Ms. Wasserman Schultz .................................................................................... X 

Mr. Maffei ......................................................................................................... X 

[Vacant].

Mr. Smith, Ranking Member ............................................................................. X 

Mr. Goodlatte .................................................................................................... X 

Mr. Sensenbrenner, Jr. ...................................................................................... X 

Mr. Coble ...........................................................................................................

Mr. Gallegly ....................................................................................................... X 

Mr. Lungren ....................................................................................................... X 

Mr. Issa .............................................................................................................

Mr. Forbes ......................................................................................................... X 

Mr. King ............................................................................................................ X 

Mr. Franks ......................................................................................................... X 

Mr. Gohmert ...................................................................................................... X 

Mr. Jordan ......................................................................................................... X 

Mr. Poe .............................................................................................................. X 


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29 

ROLLCALL NO. 5—Continued 

Ayes Nays Present 

Mr. Chaffetz ...................................................................................................... X 

Mr. Rooney ........................................................................................................ X 

Mr. Harper ......................................................................................................... X 

Total ................................................................................................ 14 20 

6. Motion to report H.R. 200 favorably, as amended. Passed 21 

to 15. 

ROLLCALL NO. 6 

Ayes Nays Present 

Mr. Conyers, Jr., Chairman ............................................................................... X 

Mr. Berman ....................................................................................................... X 

Mr. Boucher .......................................................................................................

Mr. Nadler .........................................................................................................

Mr. Scott ........................................................................................................... X 

Mr. Watt ............................................................................................................ X 

Ms. Lofgren ....................................................................................................... X 

Ms. Jackson Lee ................................................................................................ X 

Ms. Waters ........................................................................................................ X 

Mr. Delahunt ..................................................................................................... X 

Mr. Wexler ......................................................................................................... X 

Mr. Cohen .......................................................................................................... X 

Mr. Johnson ....................................................................................................... X 

Mr. Pierluisi ....................................................................................................... X 

Mr. Gutierrez ..................................................................................................... X 

Mr. Sherman ..................................................................................................... X 

Ms. Baldwin ...................................................................................................... X 

Mr. Gonzalez ...................................................................................................... X 

Mr. Weiner ......................................................................................................... X 

Mr. Schiff .......................................................................................................... X 

Ms. Sa ́nchez ...................................................................................................... X 

Ms. Wasserman Schultz .................................................................................... X 

Mr. Maffei ......................................................................................................... X 

[Vacant].

Mr. Smith, Ranking Member ............................................................................. X 

Mr. Goodlatte .................................................................................................... X 

Mr. Sensenbrenner, Jr. ...................................................................................... X 

Mr. Coble ...........................................................................................................

Mr. Gallegly ....................................................................................................... X 

Mr. Lungren ....................................................................................................... X 

Mr. Issa ............................................................................................................. X 

Mr. Forbes ......................................................................................................... X 

Mr. King ............................................................................................................ X 

Mr. Franks ......................................................................................................... X 

Mr. Gohmert ...................................................................................................... X 

Mr. Jordan ......................................................................................................... X 

Mr. Poe .............................................................................................................. X 

Mr. Chaffetz ...................................................................................................... X 

Mr. Rooney ........................................................................................................ X 

Mr. Harper ......................................................................................................... X 

Total ................................................................................................ 21 15 

COMMITTEE OVERSIGHT FINDINGS

In compliance with clause 3(c)(1) of rule XIII of the Rules of the 

House of Representatives, the Committee advises that the findings 

and recommendations of the Committee, based on oversight activities under clause 2(b)(1) of rule X of the Rules of the House of RepVerDate Nov 24 2008 01:37 Feb 25, 2009 Jkt 079006 PO 00000 Frm 00029 Fmt 6659 Sfmt 6601 E:\HR\OC\HR019.XXX HR019

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resentatives, are incorporated in the descriptive portions of this report. 

NEW BUDGET AUTHORITY AND TAX EXPENDITURES

Clause 3(c)(2) of rule XIII of the Rules of the House of Representatives is inapplicable because this legislation does not provide new 

budgetary authority or increased tax expenditures. 

CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

In compliance with clause 3(c)(3) of rule XIII of the Rules of the 

House of Representatives, the Committee sets forth, with respect to 

the bill, H.R. 200, the following estimate and comparison prepared 

by the Director of the Congressional Budget Office under section 

402 of the Congressional Budget Act of 1974. The Committee notes 

that one statement in the CBO letter might be misconstrued. Its 

statement that ‘‘H.R. 200 would not apply to debtors with loans 

guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, or the Department of Agriculture’’ incorrectly describes the rule of construction in section 8 of the bill. As 

explained in the section-by-section analysis in this report, the rule 

of construction merely provides that the obligations of the FHA, the 

VA, and USDA under their mortgage loan guarantee programs are 

unaffected by the bill. All types of mortgage loans that otherwise 

meet the terms of the bill, including those backed by the aforementioned guarantee or insurance programs, are covered by the bill. 

The Statement in the CBO letter should be read consistent with 

the Committee’s intent, as reflected in the section-by-section analysis and this paragraph. 

U.S. CONGRESS, 

CONGRESSIONAL BUDGET OFFICE, 

Washington, DC, February 23, 2009. 

Hon. JOHN CONYERS, Jr., Chairman, 

Committee on the Judiciary, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 200, the Helping Families 

Save Their Homes in Bankruptcy Act of 2009. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Leigh Angres. 

Sincerely, 

DOUGLAS W. ELMENDORF, 

DIRECTOR. 

Enclosure. 

H.R. 200—Helping Families Save Their Homes in Bankruptcy Act 

of 2009. 

Summary: H.R. 200 would authorize bankruptcy courts to modify 

the terms of some mortgages on principal residences during Chapter 13 bankruptcy proceedings. CBO estimates that enacting H.R. 

200 would reduce direct spending (in the form of increased offsetting receipts) by $31 million over the 2009–2019 period and increase revenues by $23 million over the same time period, thus reducing future budget deficits over this period by a total of $54 milVerDate Nov 24 2008 01:37 Feb 25, 2009 Jkt 079006 PO 00000 Frm 00030 Fmt 6659 Sfmt 6601 E:\HR\OC\HR019.XXX HR019

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lion. Based on information provided by the Administrative Office of 

the United States Courts (AOUSC), CBO estimates that any additional discretionary costs to adjudicate more bankruptcy cases 

would not be significant; such costs would be subject to the availability of appropriated funds. The judiciary currently spends about 

$900 million a year for all bankruptcy activities. 

The effects on direct spending over the 2009–2013 and 2009– 

2018 periods are relevant for enforcing the House’s pay-as-you-go 

rule under the current budget resolution. CBO estimates that enacting H.R. 200 would reduce direct spending by $26 million over 

the 2009–2013 period and by $31 million over the 2009–2018 period. Enacting H.R 200 would increase revenues by $18 million 

over the 2009–2013 period and $23 million over the 2009–2018 period. 

H.R. 200 would impose intergovernmental and private-sector 

mandates, as defined in the Unfunded Mandates Reform Act 

(UMRA), on certain creditors, including state and local pension 

funds and housing agencies. Because of uncertainty about the number of bankruptcy plans that would be modified as a result of this 

legislation and how those changes would affect holders of secured 

claims, CBO cannot determine whether the aggregate cost of complying with the mandates would exceed the annual thresholds for intergovernmental or private-sector mandates ($69 million in 2009 and $139 million in 2009, respectively, adjusted annually for 

inflation). 

Estimated cost to the Federal Government: The costs of this legislation fall within budget function 750 (administration of justice.) 

By Fiscal Year, in Millions of Dollars— 

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2009– 

2014 

2009– 

2019 

CHANGES IN DIRECT SPENDING 

Estimated Budget 

Authority –4 –9 –6 –4 –3 –1 –1 –1 –1 –1 * –27 –31 

Estimated Outlays –4 –9 –6 –4 –3 –1 –1 –1 –1 –1 * –27 –31 

CHANGES IN REVENUES 

Estimated Revenues 3 6 4 3 2 1 1 1 1 1 * 19 23 

Note: * = less than $500,000. 

Basis of estimate: For this estimate, CBO assumes that H.R. 200 

will be enacted near the middle of fiscal year 2009. 

H.R. 200 would allow bankruptcy courts to modify the terms of 

some mortgages for a primary residence during Chapter 13 bankruptcy proceedings. (This type of bankruptcy, often referred to as 

‘‘reorganization,’’ involves a repayment plan that sets forth how 

debts will be settled.) Under current law, Chapter 13 halts mortgage foreclosure proceedings, thus giving homeowners an opportunity to restructure their financial arrangements. Bankruptcy 

courts can establish a payment plan for overdue mortgage payments on primary residences but cannot change the amount, timing, or interest rate terms of mortgage payments. In 2008, about 

354,000 cases were filed for Chapter 13 bankruptcy, a 14 percent 

increase over the number filed in 2007. 

H.R. 200 would apply to Chapter 13 cases filed before, on, or 

after the date of enactment, but would limit which debtors would 


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qualify for a loan modification under the bill. First, the debtor’s 

mortgage would have to be initiated prior to the effective date of 

the bill and subject to a notice of foreclosure. Second, H.R. 200 

would not apply to debtors with loans guaranteed by the Federal 

Housing Administration, the Department of Veterans Affairs, or 

the Department of Agriculture. 

Finally, the bill would require debtors to inquire about loan 

modifications with their mortgage servicer. Specifically, after the 

15-day period beginning on the date of enactment, a mortgage 

modification may be proposed under Chapter 13 only if the debtor 

attempted to contact the mortgage servicer regarding a loan modification at least 15 days before filing for bankruptcy relief (this rule 

would not apply in cases where a foreclosure sale is scheduled to 

occur within 30 days of the date of the bankruptcy filing). For 

pending Chapter 13 cases, the debtor would have to certify that the 

debtor attempted to contact the mortgage holder about a loan modification. The bill would expand Chapter 13 eligibility by excluding 

home mortgage debt when determining if the debtor qualifies to file 

for Chapter 13, under certain circumstances. 

The bill also would constrain the debtor’s profit from a home sale 

in certain cases. H.R. 200 would require a debtor to share the net 

proceeds of a home sale with the lender, if the sale occurs within 

the first 4 years of the debtor completing a Chapter 13 plan. The 

amount the lender would receive would be 80 percent of the net 

profit in the first year, and then decline to 20 percent by the fourth 

year. 

Impact on Bankruptcy Filings. Bankruptcy filings fluctuate over 

time and are dependent on economic trends and personal financial 

conditions. Between 1987 and 2008, Chapter 13 filings have ranged 

from a low of 140,000 in 1987 to a high of 470,000 in 2003. The 

primary reason that individuals file for Chapter 13 is to forestall 

foreclosure on their home—over 96 percent of Chapter 13 filers are 

homeowners and 70 percent of filers propose a plan to repay overdue mortgage payments. Because of the high number of foreclosures expected over the next several years (several million, 

based on information provided by the Center for Responsible Lending), CBO expects that bankruptcy filings will substantially increase in the near term—without enactment of H.R. 200. Under 

current law, based on information provided by the AOUSC, CBO 

estimates that Chapter 13 filings are likely to increase to almost 

400,000 in 2009, a 13 percent increase over the number in 2008. 

Economists and bankruptcy experts have found that the greater 

the financial benefit gained from filing for bankruptcy, the greater 

the likelihood a household will file. CBO expects that the financial 

benefit to filing under the bill would be greater than under current 

law. Based on an analysis of similar proposals to allow loan modification in Chapter 13, CBO estimates that over one million households would benefit financially from filing for Chapter 13 bankruptcy under the bill. 

Studies analyzing household’s decision to file for bankruptcy indicate that of those households that could realize a financial benefit 

from filing for bankruptcy, only a fraction actually make the decision to file. Of the over one million households that could benefit 

from filing for bankruptcy under the legislation in the next few 

years, we estimate that about 350,000 additional households would 


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33 

file for bankruptcy over the 2009–2019 period, with about twothirds of those filings occurring within the first 3 years after enactment. 

The number of additional bankruptcy filings that would occur 

under the bill is, however, very uncertain. Some bankruptcy experts believe that filings would not increase substantially under 

H.R. 200 because the current fees and legal costs associated with 

filing for bankruptcy are high; the Government Accountability Office (GAO) reports that the median cost for filing Chapter 13 bankruptcy is $3,000. In the short term, new filings also might be limited by the supply of experienced bankruptcy lawyers who can handle additional filings. Further, some industry specialists maintain 

that the bill would encourage voluntary modification of mortgages 

outside of bankruptcy because many mortgage holders would prefer 

to work out their own arrangements rather than be subject to those 

imposed by a bankruptcy court. Other experts, however, contend 

that Chapter 13 filings would increase significantly as legal, tax, 

accounting, and payment concerns would deter voluntary modifications. Accordingly, debtors might view Chapter 13 modification as 

the best option for retaining their homes. Finally, whether significant numbers of debtors would be driven to seek bankruptcy protection by the prospect of mortgage relief might ultimately depend 

on how bankruptcy courts responded to the new authority that 

would be provided by H.R. 200. 

Budgetary Impact of Additional Bankruptcy Filings. Additional 

filings would increase collections of bankruptcy fees. Those fees 

($235 per Chapter 13 filing) are distributed among several government entities. About half of the amount collected is used to cover 

the judiciary’s and U.S. Trustees’ added costs and thus has no net 

effect on Federal spending. A portion of those filing fees, however, 

is recorded as an offsetting receipt (a credit against direct spending) in the Federal budget and deposited into a special fund in the 

Treasury; those amounts are not available for spending unless provided in an appropriation act. CBO estimates that enacting the legislation would increase such offsetting receipts by $31 million over 

the 2009–2019 period. 

Revenues. Another portion of Chapter 13 filing fees is deposited 

into the general fund of the Treasury and recorded as increased 

revenues. CBO estimates that enacting H.R. 200 would increase 

such revenues from additional Chapter 13 filing fees by $23 million 

over the 2009–2019 period. 

Potential Budgetary Impact on the Government-Sponsored Enterprises for Housing. Enacting H.R. 200 could affect the value of the 

financial instruments (mortgages and mortgage-backed securities) 

held or guaranteed by the Federal National Mortgage Association 

(Fannie Mae) and the Federal Home Loan Mortgage Corporation 

(Freddie Mac)). These government-sponsored enterprises (GSEs) 

were placed in conservatorship in 2008 and are under the direct 

control of the Federal Government. CBO considers the GSEs’ operations to be part of the Federal budget. Enacting H.R. 200 could 

change the value of those financial instruments and thus affect the 

Federal budget. It is unclear, however, whether enactment of the 

legislation would increase or decrease future costs for the GSEs. 

Losses resulting from mortgages held by the GSEs are shouldered by those entities. Modifying loans in bankruptcy might be 


wwoods2 on PROD1PC60 with REPORTS
34 

more or less costly compared to foreclosure and would depend on 

future house prices, the length of time needed to sell foreclosed 

properties, the terms of potential mortgage modifications, the likelihood of re-default for modified loans, and the amount mortgage 

payments might be reduced in the bankruptcy process. Similar uncertainty exists for the impact of H.R. 200 on the value of mortgage-backed securities guaranteed and held by the GSEs. 

Intergovernmental and private-sector impact: H.R. 200 would impose intergovernmental and private-sector mandates, as defined in 

UMRA, on certain creditors, including state and local pension 

funds and housing agencies. The bill would allow bankruptcy 

judges to modify the rights of holders of certain claims on mortgage 

debt by making changes to the terms of home mortgage agreements 

during bankruptcy proceedings. Under current law, bankruptcy 

judges are prohibited from changing the terms of loans for primary 

residences. The bill also would require such claimholders to file 

timely notice with the court before adding fees, costs, or charges 

while a bankruptcy case is pending. 

The costs of those mandates would depend on the number of 

mortgage agreements that judges would choose to modify and how 

those changes would affect the value of secured claims. The amount 

recovered by a claimholder through a bankruptcy proceeding relative to the amount that could be recovered through foreclosure 

would vary depending on market conditions. In some cases, 

claimholders might not incur any additional costs. Because of those 

uncertainties, CBO cannot determine whether the aggregate cost of 

complying with the mandates in the bill would exceed the annual 

thresholds for intergovernmental or private-sector mandates ($69 

million in 2009 and $139 million in 2009, respectively, adjusted annually for inflation). 

Estimate prepared by: Federal Costs: Leigh Angres; Impact on 

state, local, and tribal governments: Melissa Merrell; Impact on the 

private sector: Paige Piper/Bach. 

Estimate approved by: Theresa Gullo, Deputy Assistant Director 

for Budget Analysis. 

PERFORMANCE GOALS AND OBJECTIVES

The Committee states that pursuant to clause 3(c)(4) of rule XIII 

of the Rules of the House of Representatives, H.R. 200 will authorize judicial modification of a mortgage secured only by a homeowner’s principle residence in a chapter 13 bankruptcy case, under 

certain circumstances, so that such mortgage will be more affordable for an eligible homeowner. 

CONSTITUTIONAL AUTHORITY STATEMENT

Pursuant to clause 3(d)(1) of rule XIII of the Rules of the House 

of Representatives, the Committee finds the authority for this legislation in article I, section 8, clause 4 of the Constitution. 

ADVISORY ON EARMARKS

In accordance with clause 9 of rule XXI of the Rules of the House 

of Representatives, H.R. 200 does not contain any congressional 

earmarks, limited tax benefits, or limited tariff benefits as defined 

in clause 9(d), 9(e), or 9(f) of Rule XXI. 


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35 

148 15 U.S.C. § 1635 (2008). 

SECTION-BY-SECTION ANALYSIS

The following discussion describes the bill as reported by the 

Committee. 

Sec. 1. Short Title. Section 1 sets forth the short title of the bill 

as the ‘‘Helping Families Save Their Homes in Bankruptcy Act of 

2009.’’ 

Sec. 2. Eligibility for Relief. Bankruptcy Code section 109(e) sets 

forth secured and unsecured debt limits to establish a debtor’s eligibility for relief under chapter 13. Section 2 of the bill amends section 109(e) to provide that the computation of debts does not include the secured or unsecured portions of debts secured by the 

debtor’s principal residence, under two alternative circumstances. 

The first is if the current value of the debtor’s principal residence 

is less than the secured debt limit specified in section 109(e). The 

second is if the debtor’s principal residence was sold in foreclosure 

or the debtor surrendered it and its current value is less than the 

secured debt limit specified in section 109(e). 

In addition, section 2 of the bill amends Bankruptcy Code section 

109(h) to waive the mandatory requirement that a debtor have received credit counseling prior to filing for bankruptcy relief, under 

certain circumstances. The waiver applies in a chapter 13 case 

where the debtor certifies to the court as to having received notice 

that the holder of a claim secured by the debtor’s principal residence may commence (or has commenced) a foreclosure proceeding 

against such residence. 

Sec. 3. Prohibiting Claims Arising from Violations of the Truth 

in Lending Act. Under the Truth in Lending Act, a mortgage borrower has a right of rescission with respect to a mortgage secured 

by his or her residence, under certain circumstances.148 Bankruptcy Code section 502(b) enumerates various claims of creditors 

that are not entitled to payment in a bankruptcy case, subject to 

certain exceptions. Section 3 of the bill amends Bankruptcy Code 

section 502(b) to provide that a claim secured by an interest in the 

debtor’s principal residence is not entitled to payment in a bankruptcy case to the extent that such claim is subject to a remedy for 

rescission under the Truth in Lending Act, notwithstanding the 

prior entry of a foreclosure judgment. In addition, section 3 of the 

bill specifies that it shall not be construed to modify, impair, or supersede any other right of the debtor. 

Sec. 4. Authority to Modify Certain Mortgages. Under Bankruptcy 

Code section 1322(b)(2), a chapter 13 plan may not modify the 

terms of a mortgage secured solely by real property that is the 

debtor’s principal residence. Section 4 amends Bankruptcy Code 

section 1322(b) to create a limited exception to this prohibition. The 

exception only applies to a mortgage that: (1) originated before the 

effective date of this Act; and (2) is the subject of a notice that a 

foreclosure may be (or has been) commenced with respect to such 

mortgage. 

In addition, the debtor must certify pursuant to new section 

1322(h) that he or she attempted—not less than 15 days before filing for bankruptcy relief—to contact the mortgage lender (or the 

entity collecting payments on the lender’s behalf) regarding modification of the mortgage. This requirement does not apply if the 


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foreclosure sale is scheduled to occur within 30 days of the date on 

which the debtor files for bankruptcy relief. If the chapter 13 case 

is pending at the time the new section 1322(h) becomes effective, 

then the debtor must certify that he or she attempted to contact 

the mortgage lender or entity collecting payments on its behalf regarding modification of the mortgage before either: (1) filing a plan 

under Bankruptcy Code section 1321 that contains a modification 

pursuant to new section 1322(b)(11); or (2) modifying a plan under 

Bankruptcy Code section 1323 or section 1329 to contain a modification pursuant to new section 1322(b)(11). 

Under new section 1322(b)(11), the debtor may propose a plan 

modifying the rights of the mortgage lender (and the rights of the 

holder of any claim secured by a subordinate security interest in 

the residence) in several respects. It is important to note that the 

intent of new section 1322(b)(11) is permissive. Accordingly, a chapter 13 debtor may propose a plan that includes any or all types of 

modification authorized under section 1322(b)(11). 

First, the plan may provide for payment of the amount of the allowed secured claim as determined under Bankruptcy Code section 

506(a)(1). Second, the plan may prohibit, reduce, or delay any adjustable interest rate applicable on and after the date of the filing 

of the plan. Third, it may extend the repayment period of the mortgage for up to 40 years (reduced by the period for which the mortgage has been outstanding), or the remaining term of the mortgage 

beginning on the date of the order for relief under chapter 13, 

whichever is longer. 

Fourth, the plan may provide for the payment of interest at a 

fixed annual rate equal to the currently applicable average prime 

offer rate as of the date of the order for relief under chapter 13, 

as determined pursuant to specified criteria. The rate must correspond to the repayment term determined under new section 

1322(b)(11)(C)(I) as published by the Federal Financial Institutions 

Examination Council in its table entitled, ‘‘Average Prime Offer 

Rates—Fixed.’’ In addition, the rate must include a reasonable premium for risk. 

Fifth, the plan may provide for payments of such modified mortgage directly to the mortgage lender. The reference in new section 

1322(b)(11)(D) to ‘‘holder of the claim’’ is intended to include a 

servicer of such mortgage for such holder. 

New section 1322(g) provides that a mortgage may be reduced 

under new section 1322(b)(11)(A) only on the condition that if the 

debtor sells the principal residence securing the claim before the 

debtor receives a discharge under chapter 13, the debtor agrees to 

pay from the net proceeds of such sale a portion of those proceeds 

to the mortgage lender. If the residence is sold in the first year following the effective date of the chapter 13 plan, the lender is to receive 80 percent of the amount of the difference between the sales 

price and the amount of the lender’s claim (plus costs of sale and 

improvements); this amount cannot exceed, however, the amount of 

the allowed secured claim determined as if it had not been reduced 

under the new section 1322(b)(11)(A). If the residence is sold in the 

second year following the effective date of the chapter 13 plan, then 

the applicable percentage is 60 percent. If the residence is sold in 

the third year following the effective date of the chapter 13 plan, 

then the applicable percentage is 40 percent. And if the residence 


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37 

is sold in the fourth year following the effective date of the chapter 

13 plan, then the applicable percentage is 20 percent. It is the intent of the Committee that if the unsecured portion of the mortgagee’s claim is partially paid under this provision, it should be reconsidered under Bankruptcy Code section 502(j) and reduced accordingly. 

Sec. 5. Combating Excessive Fees. Section 5 of the bill amends 

Bankruptcy Code section 1322(c) to provide that the debtor, the 

debtor’s property, and property of the bankruptcy estate are not 

liable for any fee, cost, or charge incurred while the chapter 13 case 

is pending and that arises from a claim for debt secured by the 

debtor’s principal residence, unless the holder of the claim complies 

with certain requirements. It is the Committee’s intent that the 

reference in this provision to a fee, cost, or charge include an increase in any applicable rate of interest for such claim, as well as 

to a change in escrow account payments. 

The requirements with which the holder of the claim must comply are the following: First, the claimant must file with the court 

an annual notice of the fee, cost, or charge (or on a more frequent 

basis as the court determines), within 1 year after the fee, cost, or 

charge was incurred or 60 days before the case is closed, whichever 

is earlier. Failure to give the required notice is deemed to be a 

waiver by the holder of any claim for the fees, costs, or charges, 

for all purposes. Then any attempt to collect them constitutes a violation of the Bankruptcy Code’s discharge injunction under section 

524(a)(2) and the automatic stay under section 362(a), whichever is 

applicable. 

Second, the fee, cost, or charge must be lawful under applicable 

nonbankruptcy law, reasonable, and provided for in the applicable 

security agreement. Third, the value of the debtor’s principal residence must be greater than the amount of the claim, including the 

fee, cost, or charge. 

Section 5 of the bill further provides that a chapter 13 plan may 

waive any prepayment penalty on a claim secured by the debtor’s 

principal residence. 

Sec. 6. Confirmation of Plan. Bankruptcy Code section 1325(a) 

sets forth the mandatory criteria for confirmation of a chapter 13 

plan. Section 6 of the bill amends section 1325(a) to provide certain 

protections for a creditor whose rights are modified under new section 1322(b)(11). 

Section 6 imposes three new conditions for confirmation where 

the plan modifies a claim under new section 1322(b)(11). First, the 

plan must require that the creditor retain its lien until the later 

of when the claim (as modified) is paid or the debtor obtains a discharge. Second, the court must find that the modification under 

section 1322(b)(11) is in good faith. Third, the court must find that 

the debtor did not obtain the extension, renewal, or refinancing of 

credit that gives rise to a modified claim by the debtor’s material 

misrepresentation, false pretenses, or actual fraud. 

Sec. 7. Discharge. Bankruptcy Code section 1328 sets forth the 

requirements by which a chapter 13 debtor may obtain a discharge, 

and the scope of such discharge. Section 7 of the bill amends section 1328(a) to clarify that the unpaid portion of an allowed secured claim modified under new section 1322(b)(11) is not discharged. 


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Sec. 8. Rule of Construction. Section 8 provides that nothing in 

the Act or the amendments made by it may be construed to modify 

any obligation of the Federal Housing Administration, the Veterans 

Administration, or the Department of Agriculture under a contract 

that guarantees or insures the payment of any part of a loan secured by an interest in a principal residence. 

Sec. 9. Effective Date; Application of Amendments. Section 9(a) 

provides that the Act and the amendments made by it, except as 

provided in subsection (b), take effect on the Act’s date of enactment. Section 9(b) provides that the amendments made by the Act 

apply only to cases commenced under title 11 of the United States 

Code before, on, or after the Act’s date of enactment. 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italics, 

existing law in which no change is proposed is shown in roman): 

TITLE 11, UNITED STATES CODE 

* * * * * * * 

CHAPTER 1—GENERAL PROVISIONS 

* * * * * * * 

§ 109. Who may be a debtor 

(a) * * * 

* * * * * * * 

(e) Only an individual with regular income that owes, on the 

date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $250,000 and noncontingent, liquidated, 

secured debts of less than $750,000, or an individual with regular 

income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, 

noncontingent, liquidated, unsecured debts that aggregate less 

than $250,000 and noncontingent, liquidated, secured debts of less 

than $750,000 may be a debtor under chapter 13 of this title. For 

purposes of this subsection, the computation of debts shall not include the secured or unsecured portions of— 

(1) debts secured by the debtor’s principal residence if the 

current value of such residence is less than the secured debt 

limit; or 

(2) debts secured or formerly secured by real property that 

was the debtor’s principal residence that was sold in foreclosure 

or that the debtor surrendered to the creditor if the current 

value of such real property is less than the secured debt limit. 

* * * * * * * 

(h)(1) * * * 

* * * * * * * 


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(5) The requirements of paragraph (1) shall not apply in a case 

under chapter 13 with respect to a debtor who submits to the court 

a certification that the debtor has received notice that the holder of 

a claim secured by the debtor’s principal residence may commence 

a foreclosure on the debtor’s principal residence. 

* * * * * * * 

CHAPTER 5—CREDITORS, THE DEBTOR, AND THE 

ESTATE 

* * * * * * * 

SUBCHAPTER I—CREDITORS AND CLAIMS 

* * * * * * * 

§ 502. Allowance of claims or interests 

(a) * * * 

(b) Except as provided in subsections (e)(2), (f), (g), (h) and (i) 

of this section, if such objection to a claim is made, the court, after 

notice and a hearing, shall determine the amount of such claim in 

lawful currency of the United States as of the date of the filing of 

the petition, and shall allow such claim in such amount, except to 

the extent that— 

(1) * * * 

* * * * * * * 

(8) such claim results from a reduction, due to late payment, in the amount of an otherwise applicable credit available 

to the debtor in connection with an employment tax on wages, 

salaries, or commissions earned from the debtor; øor¿ 

(9) proof of such claim is not timely filed, except to the extent tardily filed as permitted under paragraph (1), (2), or (3) 

of section 726(a) of this title or under the Federal Rules of 

Bankruptcy Procedure, except that a claim of a governmental 

unit shall be timely filed if it is filed before 180 days after the 

date of the order for relief or such later time as the Federal 

Rules of Bankruptcy Procedure may provide, and except that 

in a case under chapter 13, a claim of a governmental unit for 

a tax with respect to a return filed under section 1308 shall 

be timely if the claim is filed on or before the date that is 60 

days after the date on which such return was filed as 

requiredø.¿; or 

(10) the claim for a loan secured by a security interest in 

the debtor’s principal residence is subject to a remedy for rescission under the Truth in Lending Act notwithstanding the prior 

entry of a foreclosure judgment, except that nothing in this 

paragraph shall be construed to modify, impair, or supersede 

any other right of the debtor. 

* * * * * * * 

CHAPTER 13—ADJUSTMENT OF DEBTS OF AN 

INDIVIDUAL WITH REGULAR INCOME 

* * * * * * * 


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SUBCHAPTER II—THE PLAN 

* * * * * * * 

§ 1322. Contents of plan 

(a) * * * 

(b) Subject to subsections (a) and (c) of this section, the plan 

may— 

(1) * * * 

* * * * * * * 

(10) provide for the payment of interest accruing after the 

date of the filing of the petition on unsecured claims that are 

nondischargeable under section 1328(a), except that such interest may be paid only to the extent that the debtor has disposable income available to pay such interest after making provision for full payment of all allowed claims; øand¿ 

(11) notwithstanding paragraph (2) and otherwise applicable nonbankruptcy law, with respect to a claim for a loan originated before the effective date of this paragraph and secured by 

a security interest in the debtor’s principal residence that is the 

subject of a notice that a foreclosure may be commenced with 

respect to such loan, modify the rights of the holder of such 

claim (and the rights of the holder of any claim secured by a 

subordinate security interest in such residence)— 

(A) by providing for payment of the amount of the allowed secured claim as determined under section 506(a)(1); 

(B) if any applicable rate of interest is adjustable 

under the terms of such security interest by prohibiting, reducing, or delaying adjustments to such rate of interest applicable on and after the date of filing of the plan; 

(C) by modifying the terms and conditions of such 

loan— 

(i) to extend the repayment period for a period that 

is no longer than the longer of 40 years (reduced by the 

period for which such loan has been outstanding) or 

the remaining term of such loan, beginning on the date 

of the order for relief under this chapter; and 

(ii) to provide for the payment of interest accruing 

after the date of the order for relief under this chapter 

at a fixed annual rate equal to the currently applicable 

average prime offer rate as of the date of the order for 

relief under this chapter, corresponding to the repayment term determined under the preceding paragraph, 

as published by the Federal Financial Institutions Examination Council in its table entitled ‘‘Average Prime 

Offer Rates—Fixed’’, plus a reasonable premium for 

risk; and 

(D) by providing for payments of such modified loan 

directly to the holder of the claim; and 

ø(11)¿ (12) include any other appropriate provision not inconsistent with this title. 

(c) Notwithstanding subsection (b)(2) and applicable nonbankruptcy law— 

(1) a default with respect to, or that gave rise to, a lien on 

the debtor’s principal residence may be cured under paragraph 


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(3) or (5) of subsection (b) until such residence is sold at a foreclosure sale that is conducted in accordance with applicable 

nonbankruptcy law; øand¿ 

(2) in a case in which the last payment on the original payment schedule for a claim secured only by a security interest 

in real property that is the debtor’s principal residence is due 

before the date on which the final payment under the plan is 

due, the plan may provide for the payment of the claim as 

modified pursuant to section 1325(a)(5) of this titleø.¿; 

(3) the debtor, the debtor’s property, and property of the estate are not liable for a fee, cost, or charge that is incurred 

while the case is pending and arises from a debt that is secured 

by the debtor’s principal residence except to the extent that— 

(A) the holder of the claim for such debt files with the 

court (annually or, in order to permit filing consistent with 

clause (ii), at such more frequent periodicity as the court 

determines necessary) notice of such fee, cost, or charge before the earlier of— 

(i) 1 year after such fee, cost, or charge is incurred; 

or 

(ii) 60 days before the closing of the case; and 

(B) such fee, cost, or charge— 

(i) is lawful under applicable nonbankruptcy law, 

reasonable, and provided for in the applicable security 

agreement; and 

(ii) is secured by property the value of which is 

greater than the amount of such claim, including such 

fee, cost, or charge; 

(4) the failure of a party to give notice described in paragraph (3) shall be deemed a waiver of any claim for fees, costs, 

or charges described in paragraph (3) for all purposes, and any 

attempt to collect such fees, costs, or charges shall constitute a 

violation of section 524(a)(2) or, if the violation occurs before 

the date of discharge, of section 362(a); and 

(5) a plan may provide for the waiver of any prepayment 

penalty on a claim secured by the debtor’s principal residence. 

* * * * * * * 

(g) A claim may be reduced under subsection (b)(11)(A) only on 

the condition that if the debtor sells the principal residence securing 

such claim, before receiving a discharge under this chapter and receives net proceeds from the sale of such residence, then the debtor 

agrees to pay to such holder— 

(1) if such residence is sold in the 1st year occurring after 

the effective date of the plan, 80 percent of the amount of the 

difference between the sales price and the amount of such claim 

(plus costs of sale and improvements), but not to exceed the 

amount of the allowed secured claim determined as if such 

claim had not been reduced under such subsection; 

(2) if such residence is sold in the 2d year occurring after 

the effective date of the plan, 60 percent of the amount of the 

difference between the sales price and the amount of such claim 

(plus costs of sale and improvements), but not to exceed the 

amount of the allowed secured claim determined as if such 

claim had not been reduced under such subsection; 


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42 

(3) if such residence is sold in the 3d year occurring after 

the effective date of the plan, 40 percent of the amount of the 

difference between the sales price and the amount of such claim 

(plus costs of sale and improvements), but not to exceed the 

amount of the allowed secured claim determined as if such 

claim had not been reduced under such subsection; and 

(4) if such residence is sold in the 4th year occurring after 

the effective date of the plan, 20 percent of the amount of the 

difference between the sales price and the amount of such claim 

(plus costs of sale and improvements), but not to exceed the 

amount of the allowed secured claim determined as if such 

claim had not been reduced under such subsection. 

(h) With respect to a claim of the kind described in subsection 

(b)(11), the plan may not contain a modification under the authority 

of subsection (b)(11)— 

(1) in a case commenced under this chapter after the expiration of the 15-day period beginning on the effective date of 

this subsection, unless— 

(A) the debtor certifies that the debtor attempted, not 

less than 15 days before the commencement of the case, to 

contact the holder of such claim (or the entity collecting 

payments on behalf of such holder) regarding modification 

of the loan that is the subject of such claim; or 

(B) a foreclosure sale is scheduled to occur on a date 

in the 30-day period beginning on the date the case is commenced; and 

(2) in any other case pending under this chapter, unless the 

debtor certifies that the debtor attempted to contact the holder 

of such claim (or the entity collecting payments on behalf of 

such holder) regarding modification of the loan that is the subject of such claim, before— 

(A) filing a plan under section 1321 that contains a 

modification under the authority of subsection (b)(11); or 

(B) modifying a plan under section 1323 or 1329 to 

contain a modification under the authority of subsection 

(b)(11). 

* * * * * * * 

§ 1325. Confirmation of plan 

(a) Except as provided in subsection (b), the court shall confirm 

a plan if— 

(1) * * * 

* * * * * * * 

(8) the debtor has paid all amounts that are required to be 

paid under a domestic support obligation and that first become 

payable after the date of the filing of the petition if the debtor 

is required by a judicial or administrative order, or by statute, 

to pay such domestic support obligation; øand¿ 

(9) the debtor has filed all applicable Federal, State, and 

local tax returns as required by section 1308ø.¿; 

(10) notwithstanding subclause (I) of paragraph (5)(B)(i), 

whenever the plan modifies a claim in accordance with section 

1322(b)(11), the plan provides that the holder of such claim retain the lien until the later of— 


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43 

(A) the payment of such holder’s allowed secured claim; 

or 

(B) discharge under section 1328; and 

(11) whenever the plan modifies a claim in accordance with 

section 1322(b)(11), the court finds that such modification is in 

good faith and that the debtor did not obtain the extension, renewal, or refinancing of credit that gives rise to a modified 

claim by the debtor’s material misrepresentation, false pretenses, or actual fraud. 

* * * * * * * 

§ 1328. Discharge 

(a) Subject to subsection (d), as soon as practicable after completion by the debtor of all payments under the plan, and in the 

case of a debtor who is required by a judicial or administrative 

order, or by statute, to pay a domestic support obligation, after 

such debtor certifies that all amounts payable under such order or 

such statute that are due on or before the date of the certification 

(including amounts due before the petition was filed, but only to 

the extent provided for by the plan) have been paid (other than 

payments to holders of claims whose rights are modified under section 1322(b)(11)), unless the court approves a written waiver of discharge executed by the debtor after the order for relief under this 

chapter, the court shall grant the debtor a discharge of all debts 

provided for by the plan or disallowed under section 502 of this 

title, except any debt— 

(1) provided for under section 1322(b)(5) or, to the extent of 

the unpaid portion of an allowed secured claim, provided for in 

section 1322(b)(11); 

* * * * * * * 

(c) A discharge granted under subsection (b) of this section discharges the debtor from all unsecured debts provided for by the 

plan or disallowed under section 502 of this title, except any debt— 

(1) provided for under section 1322(b)(5) or, to the extent of 

the unpaid portion of an allowed secured claim, provided for in 

section 1322(b)(11) of this title; or 

* * * * * * * 


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(44) 

MINORITY VIEWS

INTRODUCTION

The ongoing crisis in the U.S. home mortgage market has roiled, 

not just the U.S. housing market, but the very frameworks of our 

national and international financial systems. Several solutions 

have been suggested to address the crisis. To date, these measures 

have not remedied enough troubled loans to restore order to the 

market. It is urgent that we find more effective solutions, and that 

we apply them promptly. 

H.R. 200, however, is not one of the solutions that will solve the 

problem. H.R. 200 seeks to address the crisis by suspending the 

laws of economics—rather than by faithfully observing them, applying them, and thereby curing our ill economy. The bill fails to solve 

the problems in a host of ways. Rather than reduce risk to stimulate credit, it increases the risks associated with existing principal 

residence mortgages, exposing them for the first time to modification in bankruptcy. Once this dangerous precedent is set, it will be 

easier for Congress to allow for bankruptcy modification of principal residence mortgages in the future. What is more, lenders will 

be forced to increase the interest rates they charge in order to account for the potential risk that borrowers file for bankruptcy and 

loans are modified by the courts. With increased borrowing costs to 

account for risk, future housing affordability will be reduced, which 

could make homeownership more difficult in the future and push 

home prices even lower. 

Making matters still worse, H.R. 200 seeks to stem the current 

wave of foreclosures, not by targeting the subprime and nontraditional loans driving the crisis, but by indiscriminately sweeping all 

types of mortgages into bankruptcy. This blunderbuss-approach inevitably will dilute the bill’s effectiveness and inject moral hazard 

into consumer decisions regarding whether to seek voluntary loan 

modifications, enter bankruptcy, or attempt through other means 

to resolve their financial distress. What will be the result? Almost 

certainly, it will be an avalanche of unnecessary bankruptcy filings 

that will overwhelm the bankruptcy courts and needlessly drag 

millions upon millions of dollars in petitioners’ non-mortgage debt 

into bankruptcy. And because bankruptcy will permanently damage the petitioner’s credit for years to come, allowing bankruptcy 

filings in these cases may do more serious long-term injury to the 

finances of the borrowers who seek to take advantage of this provision than other potential solutions. 

More ominous still, the bill threatens to prompt a new wave of 

capital-reserve hoarding by banks. As bankruptcy courts modify 

mortgages, banks will have to increase their capital reserves to account for the impact mortgage write-downs in bankruptcy have on 

the market values of mortgage-backed securities. Increased capital 


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45 

reserves means decreased lending of all types. Thus, the bill threatens, not to solve the crisis, but merely to trigger a repeat of the 

near financial meltdown the country experienced in the fall of 

2008—a financial earthquake that precipitated the expenditure of 

hundreds of billions of taxpayer dollars. We must not tempt a repeat of that experience. 

These are but a few of the most prominent ways in which H.R. 

200, by ignoring economic realities, will only make the mortgage 

crisis and the broader economic crisis facing the country deeper, 

wider and longer. In committee, Republicans promoted alternative 

measures that could have helped to stem foreclosures and close the 

gap in voluntary mortgage workouts in harmony with fundamental 

economic principles. At mark-up, Republicans offered amendments 

that would at least have substantially narrowed the focus of this 

bill, so that it would have made bankruptcy modification available 

only on the loans that provoked the crisis, and only in ways that 

would have minimized collateral damage to the economy. All of 

these proposals were rejected by the majority. Committee Republicans therefore cannot support this legislation. 

EXPERT OPINIONS ON PRIMARY RESIDENCE MORTGAGES

IN BANKRUPTCY

• Department of Housing and Urban Development: ‘‘The Department is concerned about the effects of legislative proposals, 

such as S.61 and H.R. 200, that would remove the special status 

for principal residences. . . . Having the option of cramdown 

would increase the attractiveness of Chapter 13 filings versus 

working directly with lenders to find an appropriate loss mitigation workout plan. . . . It is the Department’s conclusion that S. 

61 and H.R. 200 create a fundamental change in the quality and 

value of residential real estate as collateral for a mortgage loan. 

It is this uncertainty that will lead to higher mortgage costs for 

most borrowers.’’ 

• Professor Christopher Mayer, Columbia Business School: 

‘‘But proposals to change the Bankruptcy Code are deeply problematic. . . . These proposals would raise future borrowing costs 

and could encourage solvent borrowers to miss payments (a form 

of moral hazard). The financial crisis would be much worse if 

fifty-two million borrowers, who are now current, attempt to invalidate their mortgages. Equally important, proposals to change 

the Code could dramatically increase bankruptcy-filing 

rates. . . . Thus, proposed reforms could push millions of borrowers into bankruptcy, delaying the resolution of the current 

crisis for years. Finally, bankruptcy reform is a blunt tool: it applies a one-size-fits-all approach to loan modification, and it 

would impact all mortgages, including the majority of outstanding loans now owned by Fannie Mae and Freddie Mac.’’ 

• Professor Todd Zywicki, George Mason University School 

of Law: ‘‘Amending the Bankruptcy Code to permit modification 

of home mortgages must appear especially tempting as a political 

matter because it doesn’t appear to require further expenditure 

of public funds, thus it appears to be ‘free’ to Washington. Allowing mortgage modification will provide a windfall for some trouVerDate Nov 24 2008 01:37 Feb 25, 2009 Jkt 079006 PO 00000 Frm 00045 Fmt 6604 Sfmt 6604 E:\HR\OC\HR019.XXX HR019

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46 

bled homeowners, but its costs will be borne by aspiring future 

homeowners and any American who uses credit of any kind, from 

car loans to credit cards. The ripple effects could deepen the troubles the currently roiling America’s consumer credit markets. Finally, because of the federal takeover of Fannie Mae and Freddie 

Mac, the losses incurred in bankruptcy may eventually come 

back to the taxpayers anyway.’’ 

• Professor Mark Scarberry, Pepperdine University School 

of Law: ‘‘Changing the risk characteristics of home mortgages 

retroactively in this way not only would likely depress further 

the value of the existing home mortgages. Increased risk would 

mean increased interest rates to compensate for the risk, and denial of mortgage credit to some who presently would qualify 

under appropriate underwriting standards. There also would be 

a shadow cast on the trustworthiness of American mortgagebacked securities. The implications are disturbing given that 

such securities are held worldwide by investors who count on the 

protection of property and contract rights under American law.’’ 

• Barclays Capital: ‘‘Losses from bankruptcy cramdowns could be 

significantly larger than servicer-driven modifications. Moral 

hazard and the potential for high plan failure rates could further 

increase losses and charge-offs without stemming foreclosures or 

accelerating a housing recovery. Bankruptcy filings could double 

or more, increasing credit card charge-offs by 2-4pp. We fear a 

massive sell-off that would worsen valuations, threatening further balance sheet write-downs.’’ 

• Julian Mann, First Pacific Advisors: ‘‘A proposed change to 

bankruptcy law to allow judges to reduce homeowners’ mortgages 

may boost the capital needs of banks and insurers by hundreds 

of billions of dollars. . . . The loss of mortgage-bond payments 

because of bankruptcy changes would require financial institutions to mark down more securities to market values. . . . [T]he 

proposed changes would raise the cost of loans and cause foreign 

investors to flee American debt creating doubt about U.S. contracts. . . . [M]any borrowers will end up defaulting on debt reworked by bankruptcy judges.’’ 

• UBS Investment Research: ‘‘[T]he proposal to allow primary 

residence cramdowns, if passed in its current form, would likely 

have dire consequences—resulting in a sizable wave of new 

bankruptcy filings. . . . The compilation of [impacts of the legislation] is likely to put further strain on the financial system, increase losses, decrease the availability of credit and increase risk 

premiums for mortgages and consumer debt.’’ 

• Justice Stevens, Nobelman v. American Savings Bank: ‘‘At 

first blush it seems somewhat strange that the Bankruptcy Code 

should provide less protection to an individual’s interest in retaining possession of his or her home than of other assets. The 

anomaly is, however, explained by the legislative history indicating that favorable treatment of residential mortgagees was intended to encourage the flow of capital into the home lending 

market.’’ 


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47 

1 11 U.S.C. § 1322(b) (emphasis added); accord 11 U.S.C. § 1123(b)(5) (for Chapter 11 bankruptcies). 2 Nobelman v. American Savings Bank, 508 U.S. 324 (1993). 3 Id. at 332 (Stevens, J. concurring). 4 Bankruptcy Act of 1898, Pub. Law No. 61, 30 Stat. 544-66 (repealed 1978), § 606(1)). 

5Grubbs v. Houston First American Savings Association, 730 F.2d 236 (5th Cir. 1984), and 

Matter of Clark, 738 F.2d 869 (7th Cir. 1984), contain summaries of the legislative history of 

section 1322 of the Bankruptcy Code. 6 Bankruptcy Reform Act of 1978: Hearings Before the Subcommittee on Improvements to the 

Judicial Machinery, S. Comm. on the Judiciary, 95th Cong. 702–14 (1977) (testimony of Edward 

J. Kulick). 

BACKGROUND

A. Primary Residence Exception 

Section 1322(b)(2) of the Bankruptcy Code provides that a Chapter 13 bankruptcy plan may: ‘‘modify the rights of holders of secured claims, other than a claim secured only by a security interest 

in real property that is the debtor’s principal residence.’’ 1 This important exception means that home mortgages may not be modified 

in bankruptcy and that the original contract between the borrower 

and the lender must be maintained. 

While this limitation may seem to be an unwarranted anomaly, 

Justice Stevens explained the importance of the exception in 

Nobelman v. American Savings Bank: 2

At first blush it seems somewhat strange that the Bankruptcy Code should provide less protection to an individual’s interest in retaining possession of his or her home 

than of other assets. The anomaly is, however, explained 

by the legislative history indicating that favorable treatment of residential mortgagees was intended to encourage 

the flow of capital into the home lending market.3

The legislative history of the primary residence exception buttresses Justice Stevens’ explanation in Nobelman. Under Chapter 

XIII of the Bankruptcy Act of 1898, the statutory predecessor of the 

current Chapter 13, an individual wage earner’s reorganization 

plan could not ‘‘deal with’’ (i.e. modify or otherwise affect) the 

rights of a creditor holding a claim secured by real property.4 In 

1978, when Congress set about updating the Bankruptcy Act of 

1898, it had the opportunity to eliminate that exception, but specifically chose not to do so.5

As originally proposed, the House version of section 1322 of the 

Bankruptcy Code entirely eliminated this rule. The Senate version, 

on the other hand, preserved the real estate protection afforded 

under the 1898 Act. Edward J. Kulick, who testified before the 

Senate Judiciary Committee’s Subcommittee on Improvements in 

the Judicial Machinery, pointed out that reducing a mortgagee’s secured claim to the actual present value of the real property would 

have a dramatically negative impact on the mortgage industry.6 In 

discussing the residential mortgage market, he testified that the 

proposed House version of section 1322 (which would have allowed 

cram-down) would have a decidedly negative impact on the availability of home mortgage funds, especially when the financial resources of an individual home buyer were not particularly strong. 

He proposed the carved out anti-modification language that is presently in section 1322 of the Code. 


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7Grubbs, 730 F.2d at 246. 

Thus, the anti-modification (anti-cramdown) protection that is afforded to home mortgage lenders under section 1322 and Nobelman 

has its roots in the Bankruptcy Act of 1898. In 1978, a compromise 

was reached when the mortgage industry agreed to permit limited 

modification of the rights of home mortgage lenders under section 

1325 of the Code. This compromise was reached because the home 

mortgage industry, which performed a valuable public service 

through the making of loans, needed special protection against 

modification.7 The intent of section 1322(b)(2) of the Code was to 

preserve the availability of residential mortgage funding for individuals of modest means. 

The protections afforded home mortgage lenders in Chapter 13 

were, in 1994, extended to Chapter 11 cases as well. In 1994, 11 

U.S.C. § 1123(b)(5) was amended so that it too states that secured 

claims can be modified ‘‘other than a claim secured only by a security interest in real property that is the debtor’s principal residence.’’ 

B. Foreclosure Crisis 

The problem now challenging financial markets and the economy 

stems from historically low interest rates that encouraged millions 

of Americans to refinance their fixed rate mortgages or to purchase 

new homes. The lower interest rates meant that buyers could afford larger mortgages. Effectively, a bidding war broke out that 

raised the price of homes; higher prices limited the number of potential buyers. In response, the mortgage industry developed new 

products that allowed otherwise unqualified individuals (by income, 

assets, and/or credit history) to receive loans to buy or refinance a 

house. These same products also allowed creditworthy households 

to buy more expensive houses or to refinance their current houses 

to obtain cash for other uses. 

Many borrowers took out riskier mortgage instruments, referred 

to as ‘‘subprime’’ loans. In recent years, subprime loans have come 

to account for an ever larger share of the mortgage finance market. 

By 2005, they accounted for about 20 percent of all outstanding 

mortgages, up from just 5 percent in 1994. Among the several distinct types of subprime loans on the market, the one causing considerable concern is the subprime hybrid called ‘‘2/28’’ or ‘‘3/27,’’ 

which allows borrowers a low monthly payment during the first 

two to three years, but then resets to a higher interest rate and 

payment for the remaining 28 or 27 years, respectively. As these 

interest rates reset, many borrowers have been unable to meet the 

higher payment. As a result, defaults and foreclosures are rising. 

The foreclosure crisis is the result of borrowers, lenders, brokers 

and investors all getting caught up in the ‘‘irrational exuberance’’ 

of the rising market: 

• Brokers eager to earn fees sought out previously underserved, less-qualified borrowers. 

• Lenders competing for business relaxed underwriting standards, and shifted credit risk to Wall Street by selling pools 

of loans to issuers of mortgage-backed securities. 


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• Borrowers exploited lax underwriting standards: many overstated their incomes, borrowing more than they could reasonably expect to repay and purchasing more expensive 

homes than they could truly afford. Many borrowers put 

down very small downpayments on the assumption that rising prices would build equity in their homes. Some even 

gambled on being able to buy and ‘‘flip’’ an investment property before introductory rates ended. 

• Wall Street eagerly securitized millions of loans, unconcerned about loan quality as long as there were buyers for 

the securities, which increased the capital available to lenders to keep the cycle going. 

Also contributing to the creation of the crisis and the encouragement of lax underwriting standards was the purchasing and insuring of non-traditional and subprime loans by Freddie Mac and 

Fannie Mae (‘‘GSEs’’). For example, in 1992, when Congress imposed an affordable housing mission on the GSEs, the Department 

of Housing and Urban Development issued regulations that required them to make affordable housing more plentiful. In order to 

meet HUD’s requirements and to keep their support in Congress, 

the GSEs began purchasing and insuring more and more subprime 

and non-traditional loans. This ready-market for mortgages at the 

GSEs spurred on the easy lending and lax underwriting that led 

to the housing bubble. 

When this housing bubble burst, the result was and has continued to be a foreclosure crisis. Currently, approximately four million 

homeowners are delinquent on their mortgages and another twelve 

to fifteen million are underwater on their loans, owing more on 

their mortgage than their house is worth. According to Case and 

Shiller/S&P, housing prices dropped about 18 percent last year. Declining housing prices and lax underwriting standards when loans 

were written led to 2.25 million foreclosures being started last year 

according to the Federal Reserve and projections for another 1.7 

million foreclosure starts this year. 

DISCUSSION

A. Proponents’ Rationale 

Those lawmakers and advocacy groups pushing for reforms to the 

Bankruptcy Code are doing so because they believe that other options will not be an adequate avenue to keeping borrowers in their 

homes. In general, a borrower in default on his loan may: 

• repay the loan, curing the default; 

• refinance the loan to a loan with a lower interest rate and 

thus a lower monthly payment; 

• try to work with the lender to restructure the mortgage to 

bring his monthly obligations in line with his ability to pay; 

• if the home’s market value is greater than the loan balance, 

the borrower is likely to sell it himself; or 

• if the loan balance is greater than the home’s value, let the 

lender pursue foreclosure. 


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The two best two options, refinancing and loan modification, are, 

according to advocacy groups, often not available to subprime borrowers facing default. Refinancing at a lower interest rate is often 

not available because the borrower either cannot qualify or because 

the value of the house has dropped so that the house is currently 

mortgaged for more than its worth. Loan modification or loan 

workout is often not an option because: the borrower is unable to 

determine who the actual holder of the mortgage note is; mortgage 

servicers who are not the mortgage holders are scared that modifying a mortgage may make them legally liable to the mortgage 

holder; servicers are overwhelmed with requests for modification; 

or the borrower does not qualify for modification under the lender’s 

policies. 

Advocacy groups also assert that no one wins in a foreclosure 

and thus bankruptcy reform is the best option for everyone. They 

argue that a foreclosure can cost a lender from 20 to 40 percent of 

the loan balance, and that lenders should prefer to have a performing loan (albeit adjusted through bankruptcy) than have a vacant property in a slow market. Overall, advocacy groups’ basic 

claim is that the proposed bankruptcy reform would be better than 

foreclosure in terms of cost to lenders, but at least with bankruptcy 

reform borrowers would get to stay in their homes. Moreover, supporters assert that houses around a home that is foreclosed lose 

value; thus avoiding foreclosure is a benefit to surrounding homes. 

B. Consequences of Enacting H.R. 200 

Proponents of H.R. 200 have sold the bill as the ‘‘costless’’ solution to the foreclosure crisis because it does not require any upfront 

government spending. In this regard, H.R. 200 appears to be particularly appealing legislation. However, this bill is far from 

costless. On the contrary, H.R. 200 is deeply flawed and will create 

costs for taxpayers and future borrowers. Moreover, it will send 

ripple effects through the credit markets, the housing market, and 

the bankruptcy system. 

1. Cost to future borrowers 

Some of the largest costs this bill will impose will be borne by 

future homeowners and current homeowners who seek to refinance 

in the future. Allowing home mortgages to be re-written in bankruptcy will significantly increase the risks associated with mortgage lending thus increasing the costs of lending. Those costs will 

be passed on to the borrower. In fact, the lending industry contends 

that this legislation would raise interest rates by as much as two 

full percentage points on a primary residence mortgage. Moreover, 

lenders would be forced to require higher down-payments or mortgage insurance for all primary residence mortgages—requirements 

that would most affect low- and middle-income families. As a result, instead of actually helping families affected by the subprime 

crisis, this legislation threatens to do no more than swap the victims. 

Indeed, at today’s interest rates, a prime borrower with a 30-year 

fixed rate loan of $300,000 at 6% interest would pay $1,799 per 

month in principal and interest. If mortgage bankruptcy legislation 

is enacted, the Mortgage Bankers Association estimates that holdVerDate Nov 24 2008 01:37 Feb 25, 2009 Jkt 079006 PO 00000 Frm 00050 Fmt 6604 Sfmt 6604 E:\HR\OC\HR019.XXX HR019

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8 H.R. 200, ‘‘Helping Families Save Their Homes in Bankruptcy’’: Hearing Before the H. Comm. 

on the Judiciary, 111th Cong. (2009) (testimony of Christopher J. Mayer, Senior Vice Dean, Columbia Business School). 9 Id. 

ing the economy, interest rates, borrower’s credit, etc. constant, the 

rate for the same loan could go up to as much as 8%, leading to 

a monthly payment of $2,201, an annual increase of $4,824 and 

more than $144,000 over the life of the loan. 

One does not have to take the Mortgage Bankers Association’s 

word on the effects of the bill. In testimony before this Committee, 

Christopher Mayer, Senior Vice Dean and Paul Milstein Professor 

of Real Estate at Columbia Business School, confirmed that costs 

will increase if this legislation is enacted. According to Professor 

Mayer, ‘‘empirical evidence suggests that if mortgages are subject 

to strip-down in bankruptcy, the cost of future credit will rise as 

lenders incorporate this new risk into their lending decisions.’’ 8 Additionally, Professor Mayer testified that ‘‘[b]ankruptcy reform 

would increase borrowing costs further, resulting in even less borrowing and likely further reduce demand for housing.’’ 9

Proponents of the bill have argued that because the manager’s 

amendment limits the bill to existing mortgages, this bill will not 

impose costs on future borrowers. This argument is inaccurate for 

several reasons. First, the costs of writing down a loan because of 

bankruptcy must be borne by someone. That cost cannot be passed 

on to current borrowers, because their loans have already been consummated. Thus, the costs of write-downs will have to be passed 

on to future borrowers. Second, once the precedent has been set, it 

will be much easier for Congress to allow for modification of principal residence mortgages in the future, as has been done in the 

past with Chapter 12 of the Bankruptcy Code, which started off as 

a temporary section and was eventually made permanent. The uncertainty over whether this new bankruptcy modification will be 

extended in the future or made permanent will become a factor 

that lenders will price into their loans. Finally, if mortgage-backed 

securities investors are hit with massive write-downs on top of the 

write-downs they are already taking, those investors will be less 

likely to put capital back into the market in the future or will seek 

higher premiums before they invest. Less capital or higher premiums will lead to higher borrowing costs. 

2. Cost to taxpayers 

The exposure to taxpayers from non-performing mortgages is 

very large. The outstanding debt and mortgage guarantees from 

Freddie Mac and Fannie Mae (‘‘GSEs’’) are in excess of $5 trillion. 

Additionally, the Federal Housing Administration (FHA) has hundreds of billions of dollars in loans at risk and the Federal Deposit 

Insurance Corp. (FDIC) has billions more from loan guarantees 

through takeovers of Indy Mac, Washington Mutual, and other 

failed lenders. The government also has guarantees for debt from 

loans to AIG, Citigroup, and Bank of America. Moreover, the Federal Reserve has risks from former Bear Sterns securities and 

other securities it now holds as collateral. This exposure would be 

compounded if the federal government creates a ‘‘bad bank’’ to purchase and manage troubled assets. 


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10FHA Oversight of Loan Originators: Hearing Before the H. Comm. on Financial Services, 

111th Cong. (2009) (testimony of Philip Murray, Deputy Assistant Secretary for Single Family 

Housing, Department of Housing and Urban Development). 

Because of this exposure, allowing bankruptcy modification of 

principal residence home mortgages would be costly to the federal 

government and the taxpayers. For example, when a mortgage that 

has been packaged into a mortgage-backed security guaranteed by 

the GSEs is modified in bankruptcy, the value of the mortgage is 

negatively affected. The GSEs would realize a loss on the guarantee, and those losses flow through to the federal government in 

its role as conservator of those institutions and thus to taxpayers. 

In addition, prior to the enactment of the ‘‘Emergency Economic 

Stabilization Act’’ (which created the Troubled Asset Relief Program, or ‘‘TARP’’) and recent actions by the Federal Reserve, it was 

private sector parties owning mortgage-backed securities that 

would bear any losses resulting from cram downs. However, under 

TARP the federal government can buy troubled loans and mortgage-backed securities. The government has also guaranteed 

against losses from some large financial institutions. Bankruptcy 

modification of this debt and mortgage-backed securities would 

trigger massive losses for the federal government and taxpayers. 

3. FHA/VA lending programs 

The FHA and the Department of Veterans Affairs (VA) have programs that make affordable, low down-payment loans possible, by 

providing lenders insurance against non-payment by borrowers. 

This insurance, however, does not cover losses due to bankruptcy 

cram-down. Moreover, FHA/VA servicers could endure losses on 

FHA/VA loans if they are required to advance principal and interest payments on the original, pre-bankruptcy modified loan balance, rather than on the reduced amount. Therefore, reducing the 

principal through bankruptcy cram-down would cause devastating 

financial losses to FHA/VA lenders. Without the protection of government insurance, lenders will be driven away from offering low 

down payment FHA/VA loans, especially at low interest rates. Instead lenders will either move to higher down payment loan programs which offer more protection against cram-down risk or exit 

FHA/VA lending altogether. In either case, cram-down will reduce 

the availability and increase the cost of low down payment loans. 

As an assistant deputy secretary of Housing and Urban Development recently testified, ‘‘any legislation in this area would likely 

create a powerful disincentive to doing business with FHA and [the 

Government National Mortgage Association.]’’ 10

The outcome to which the HUD official testified is particularly 

bad considering that FHA/VA loans are not the problem. While 

foreclosure rates for other types of loans have skyrocketed over the 

past year, foreclosure rates for FHA/VA loans have remained low 

and stable. This stability is due in large part to robust FHA/VA 

foreclosure-prevention and loan-modification programs. In fact, 

FHA loans have less than one-third of the foreclosure rate of 

subprime loans and VA foreclosure rates are even lower. 

The manager’s amendment attempted, but failed, to deal with 

the FHA/VA insurance problem. The manager’s amendment inserted a non-binding rule of construction designed to exempt FHA/ 


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11 According to Standard & Poor’s Ratings Direct, ‘‘[w]hile losses resulting from loan modifications outside of bankruptcy are allocated according to the rules governing traditional credit 

losses, losses from bankruptcy principal write-downs and other judicial modifications to the secured lien may be allocated in certain transactions to all of the securities pro rata after the 

transaction reaches a minimum threshold of bankruptcy losses.’’ Standard & Poor’s, The Potential Effect of Proposed Bankruptcy ‘‘Cram-Down’’ Legislation on U.S. RMBS , Ratings Direct, 

January 30, 2009, at 4. 12 Id. at 9. 13 Id. at 4. 14 J.P. Morgan, Securitized Products Weekly, January 23, 2009, at 11. 15 Jody Shenn, Bankruptcy Bill May Hurt Banks on Mortgage-Bond Quirk, Bloomberg, Jan. 

21, 2009, http://www.bloomberg.com/apps/news?pid=20601009&sid=abIxZqXis96s. 16 J.P. Morgan, supra note 14, at 11. 

VA loans from cram-down. However, it is unclear how this rule 

would even work—the changes H.R. 200 makes to section 1322(b) 

do not exempt FHA/VA loans but the courts are directed to interpret the statute as if they are exempted. Such an approach to exempting FHA/VA loans is highly questionable, and thus the FHA/ 

VA insurance problem remains despite the manager’s amendment 

to H.R. 200. 

4. Bank write-downs 

Recent analysis of the proposals to allow bankruptcy courts to 

modify principal residence home mortgages concludes that the 

write-downs associated with allowing bankruptcy modification 

could require banks to increase their capital reserves by hundreds 

of billions of dollars. This is because there is language in the 

prospectuses of many mortgage-backed securities that would cause 

bankruptcy losses to be shared among all securities holders, even 

those that hold AAA rated bonds.11 Indeed, according to Standard 

& Poor’s, because bankruptcy carve-outs ‘‘were not initially sized 

for the change in law the proposed legislation contemplates,’’ 12 it 

can be expected that ‘‘increases in bankruptcy losses could, in short 

order, result in principal losses being allocated to the senior-most 

certificates.’’ 13

In instances where the loss is shared by AAA bonds, according 

to J.P. Morgan, ‘‘rating agencies may downgrade a significant 

amount of AAA securities to below investment grade.’’ 14 More bank 

write-downs will result if securities are downgraded below AAA. 

According to Julian Mann of First Pacific Advisors, the ‘‘loss of 

mortgage-bond payments because of the bankruptcy changes would 

require financial firms to mark down more securities to market values.’’ 15 As J.P. Morgan analysis of the situation explains, 

This means that assets will need to be marked-to-market, 

with losses hitting income. An even larger issue is around 

risk based capital weightings. For example, AAA securities 

have a 20% weighting, while BB has a 200% weighting. 

This means that banks and insurance companies could be 

required to hold 10 times more capital (or more if downgraded below BB), even though non-bankruptcy related 

loss scenarios show minimal risk of loss to the AAA.16

The Treasury Department, through the TARP, and the Federal 

Reserve have spent the past few months trying to infuse capital 

into banks. Write-downs related to this bankruptcy legislation 

would be counter-productive and could threaten to undo their efVerDate Nov 24 2008 01:37 Feb 25, 2009 Jkt 079006 PO 00000 Frm 00053 Fmt 6604 Sfmt 6604 E:\HR\OC\HR019.XXX HR019

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forts or require them to infuse more capital into the banking system. 

5. Increased bankruptcy filings will lead to delay, less oversight 

Some experts believe that bankruptcy filings could double or triple as a result of this legislation. Currently, about 80,000 Americans file for bankruptcy each month—a rate that is just shy of the 

roughly 100,000 house per month foreclosure rate. Recent numbers 

indicate that some 4 million homeowners are currently delinquent 

on their mortgages and some 12-15 million homeowners are underwater on their mortgages. A surge in bankruptcy filings could result if even a fraction of these homeowners file for bankruptcy in 

order to reduce their interest rates or cram-down the principal 

owing on their homes. 

It does not appear that the bankruptcy courts, the U.S. Trustees 

program, or Chapter 13 trustees could effectively handle an increased volume of cases over a short period of time. Thus, a dramatic surge in filings related to this bill could lead to delayed resolution of the crisis and less oversight of bankruptcy cases. 

In terms of bankruptcy judges, enactment of H.R. 200 will increase the burden on court dockets. This increased burden will 

come in the form of the large number of new Chapter 13 filings and 

the adjudication of issues of first impression that H.R. 200 will create. For example, in section 4 of H.R. 200, the phrase ‘‘notice that 

a foreclosure may commence’’ raises legal and factual questions: 

does a call or letter from a lender stating that if the late mortgage 

payments are not made the bank may begin the foreclosure process 

suffice, or does the borrower actually have to receive notice that 

the bank has begun the foreclosure process. Additionally, most 

cases will raise disputes regarding the value of the home and the 

appropriate ‘‘reasonable premium for risk’’ to apply. 

H.R. 200 will also place increased burdens on the United States 

Trustees. United States Trustees appoint and oversee private 

Chapter 13 trustees, enforce fraud and abuse provisions of the 

Bankruptcy Code, and litigate important legal issues arising in 

bankruptcy cases. It may not be possible for the U.S. Trustees to 

maintain their current level of oversight of the bankruptcy system 

with the increased Chapter 13 bankruptcies that will be filed if 

H.R. 200 is enacted. 

Also affected by an increase in Chapter 13 filings would be the 

private Chapter 13 trustees, who are the backbone of the Chapter 

13 system; they administer the Chapter 13 plan, assess the viability of the debtor’s proposed repayment plan, collect funds from the 

debtor, and distribute proceeds to creditors. Allowing modification 

of principal residence home mortgages will necessarily increase the 

workload for Chapter 13 trustees. A steep increase in Chapter 13 

filings may quickly overwhelm trustees who are not adequately 

staffed to process the increased caseload. 

In sum, the increased filings after enactment of H.R. 200 will 

make it harder for the Chapter 13 system to function, leading to 

either a much slower process, decreased oversight of the system, or 

some combination thereof. The goal of foreclosure relief should be 

to resolve this crisis as quickly as possible. It does not appear, howVerDate Nov 24 2008 01:37 Feb 25, 2009 Jkt 079006 PO 00000 Frm 00054 Fmt 6604 Sfmt 6604 E:\HR\OC\HR019.XXX HR019

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17 A recent study by the Office of the Comptroller of the Currency found that more than 50 

percent of borrowers that receive a loan modification missed at least one payment in the six 

months after the lender modified their loans. 18The manager’s amendment put some limitations on this, allowing for some lender recapture 

if the house is sold within five years of completion of the Chapter 13 plan. 19 H.R. 200, ‘‘Helping Families Save Their Homes in Bankruptcy’’: Hearing Before the H. 

Comm. on the Judiciary, 111th Cong. (2009) (written testimony of Todd J. Zywicki, Professor, 

George Mason University School of Law). 

ever, that the bankruptcy system is the route to a quick resolution 

of the crisis. 

6. Failure rate in bankruptcy 

Approximately two-thirds of all Chapter 13 bankruptcies terminate before being completed. These failures to complete the Chapter 13 plan leave the homeowners liable for their mortgage debt 

and creditors in a much worse position relative to having addressed 

the problem at the time of the bankruptcy filing. With the likelihood that a Chapter 13 plan will fail, allowing bankruptcy modifications may only delay a resolution of the foreclosure crisis. Some 

suggest that allowing modification will increase the success rate; 

however, any increase would have to be significant to make bankruptcy modification even moderately successful at addressing the 

foreclosure crisis. The 57 percent failure rate for Chapter 12 bankruptcies, in which cram-down is currently allowed, suggests that 

the failure rate for Chapter 13 bankruptcies will still be significant 

even if H.R. 200 is enacted.17

7. Moral hazard and bankruptcy abuse 

H.R. 200 presents incentives to file for bankruptcy that could 

lead to borrowers opting for bankruptcy rather than loan modifications and could create moral hazard leading many borrowers to 

abuse the system. First, in terms of loan modifications, borrowers 

may have little incentive to accept non-bankruptcy loan modification programs when they can petition a bankruptcy court to have 

their mortgage crammed-down to the fair market value. Cramdown gives the borrower a permanent reduction in the outstanding 

mortgage debt. When housing prices rise, as they eventually will, 

the borrower enjoys the appreciation.18 With this possibility out 

there, borrowers would have a strong incentive to reject a lender 

offered modification proposal and either hold out for a better deal 

or file for bankruptcy. 

In addition to the problems this bill may create with regard to 

loan modifications, enactment of H.R. 200 could lead to the possibility that borrowers will abuse the bankruptcy system to take advantage of incentives to filing for bankruptcy created by the bill. 

These incentives have not existed in the past as ‘‘[t]raditionally, the 

ability to modify consumer debt was limited to depreciating assets 

like cars and boats, thus this temptation for strategic behavior was 

mitigated because borrowers had little prospect of profiting because 

the property was unlikely to increase in value in the future.’’ 19

Currently, approximately 50 million borrowers are paying their 

mortgages on time; however, roughly a third of these borrowers 

owe more on their mortgage than their house is worth. For these 

borrowers who are underwater on their mortgages, the otherwise 

unappealing prospect of filing for bankruptcy may become an atVerDate Nov 24 2008 01:37 Feb 25, 2009 Jkt 079006 PO 00000 Frm 00055 Fmt 6604 Sfmt 6604 E:\HR\OC\HR019.XXX HR019

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20Mayer, supra note 8. 

tractive option once cram-down of mortgage principal is made possible. As Professor Mayer has pointed out, ‘‘[w]hile many commentators have downplayed this argument as scare tactics, it is not 

hard to envision late night TV advertisements informing homeowners that they no longer need to make their mortgage payments 

and yet could still remain in their home.’’ 20

Proponents of H.R. 200 have asserted that the concern over negative impact on credit scores will prevent borrowers from abusing 

the system. However, the fact that many borrowers are walking 

away from underwater mortgages, allowing those homes to be foreclosed, when delinquency and foreclosure also negatively impact 

one’s credit score, undercuts this argument. The chance to reduce 

principal by tens or even hundreds of thousands of dollars in some 

cases, to re-write the interest rate, and extend the maturity date 

of a mortgage may encourage many borrowers to go into bankruptcy despite the adverse impact on their credit score. 

8. Nothing will stop future Congresses from applying cramdown more broadly 

The manager’s amendment to H.R. 200 limits the bill to existing 

mortgages; however, once the precedent has been set, it will be 

much easier for Congress to provide for modification of principal 

residence mortgages in the future. Indeed, if the past is a prologue, 

it should be expected that this is exactly what will happen. Chapter 12 of the Bankruptcy Code provides the perfect example. The 

Chapter 12 family farmer bankruptcy provisions were originally 

enacted in 1986 with a seven-year sunset. In 1993, that sunset was 

extended by five years and was subsequently extended multiple 

times, with only a brief lapse, until Chapter 12 was made permanent in 2005. 

Because of the history of Chapter 12 and of other sunsets that 

are later extended, once the principal residence exemption is lifted, 

even if for only existing mortgages, the risk exists that this limited 

opening will be broadened in the future. Lenders will price mortgages for this risk accordingly. 

C. Republican Amendments 

At the January 27, 2009, markup of H.R. 200, Republican members of the Committee offered five amendments. With the exception 

of an amendment offered by Mr. King, all Republican amendments 

were defeated on party-line votes. 

Smith Amendment: Ranking Member Smith offered an amendment that would have required courts to apply a three-step process, 

modeled after that employed by the Federal Deposit Insurance Corporation (FDIC), when altering mortgages to keep monthly mortgage payments between 31 percent and 38 percent of a homeowner’s current monthly income. Also similar to the FDIC approach, the Smith Amendment would have required debtors to 

agree to equity recapture for lenders if the debtor sells the house 

for a profit after an equity cramdown. Mr. Smith’s amendment was 

defeated on a 14 to 20 party-line vote. 


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Franks Amendment: Mr. Franks offered an amendment that 

would have limited the bill to loans originated between January 1, 

2004 and December 31, 2007, the time-frame during which many 

of the most problematic loans were made. Additionally, Mr. Franks’ 

amendment would have limited the bill’s provisions to bankruptcies 

filed within three years of the date of enactment. Mr. Franks’ 

amendment was defeated on a 15 to 20 party-line vote. 

Forbes Amendment: Mr. Forbes offered an amendment that 

would have maintained the requirement that those debtors that receive mortgage modifications go through credit counseling. The 

amendment also would have precluded debtors that made misrepresentations or committed actual fraud from modifying their 

mortgages in bankruptcy. Mr. Forbes’ amendment was defeated on 

a 12 to 20 party-line vote. 

King Amendment: Mr. King offered an amendment to prohibit 

debtors who obtained or refinanced their loans based on material 

misrepresentations, false pretenses, or actual fraud from being able 

to modify their mortgages in bankruptcy. Mr. King’s amendment 

was agreed to on a 21 to 3 vote. 

Jordan Amendment: Mr. Jordan offered an amendment to 

limit bankruptcy mortgage modification to subprime and non-traditional loans—the two types of loans at the heart of this crisis. Such 

a limitation was included in the version of the mortgage bankruptcy bill reported out of this Committee in the last Congress 

(H.R. 3609, 110th Cong.). Mr. Jordan’s amendment was defeated on 

a 14 to 20 party-line vote. 

D. Answers to Majority’s Rationale for Rejecting Republican Amendments 

As discussed above, at the markup Republicans offered five 

amendments aimed at narrowing the scope of the bill to those loans 

that are at the heart of the foreclosure crisis. In arguing against 

supporting Republican amendments, members of the majority 

made several arguments. These arguments are incorrect or miss 

the mark. Below are responses to the majority’s principal arguments: 

1. Vacation homes, second homes, and other secured debt in 

bankruptcy 

Throughout the debate over mortgage bankruptcy legislation in 

this and the last Congress, the argument has been repeatedly made 

that this legislation is not extraordinary because the Bankruptcy 

Code already permits the modification of other forms of secured 

debt in bankruptcy. As attractive this argument may be, it is simply not the case. 

Under the current provisions of Chapter 13, if a secured creditor’s lien is crammed-down, the entire amount of the secured claim 

(after the cram-down) plus interest must be paid off during the 

three-to-five year duration of the Chapter 13 plan. For example, 

were a Chapter 13 debtor to submit a plan that proposed to cramdown a mortgage on a vacation home from $450,000 to $400,000, 

that plan would have to provide for the payment of the entire 

$400,000 in three-to-five years in equal monthly installments. Accordingly, as a practical matter, a debtor cannot cram-down a first 


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21The bankruptcy judge could set the interest rate at ‘‘a fixed annual percentage rate, in an 

amount equal to the then most recently published annual yield on conventional mortgages . . . 

plus a reasonable premium for risk.’’ 22 U.S. Department of Agriculture, Do Farmers Need a Separate Chapter in the Bankruptcy 

Code?, at 3 (1997). 

mortgage on a vacation home, because the payments needed to pay 

off even the crammed-down amount over three-to-five years will be 

too large. In the unlikely circumstance that a debtor could afford 

such large payments, that debtor would be undeserving of bankruptcy relief. 

Under H.R. 200, however, a debtor could pay off a crammeddown home mortgage over a period that could be in excess of thirty 

years. Thus, H.R. 200 makes cram-down feasible for home mortgages—treating home mortgages much differently than mortgages 

on vacation homes and other investment property. Moreover, the 

interest rate to which the holder of the home mortgage would be 

entitled for the thirty-plus year period would be set by the court 

rather than by the mortgage contract.21 Conversely, when other secured creditors’ liens are crammed-down in Chapter 13, the liens 

are subject to a court-determined interest rate for no more than 

five years and cannot be required to wait longer to be paid. 

Furthermore, since enactment of the 2005 amendments to the 

Bankruptcy Code, in many instances, limitations have been placed 

on the ability to cram-down the claims of secured creditors in 

Chapter 13. For instance, auto loans are only subject to cram-down 

if the loan was made more than 910 days (roughly two and half 

years) prior to filing for bankruptcy. Thus, H.R. 200 moves home 

mortgages from receiving special protection aimed at encouraging 

the flow of capital into the home mortgage market, to being treated 

less favorably than most other secured consumer debts, including 

debts for depreciating assets like automobiles. 

2. Family farms in Chapter 12 

Proponents of H.R. 200 have pointed to the family farmer provisions of Chapter 12, which allow for cram-down, in support of their 

argument that principal residence mortgage modifications should 

be allowed in Chapter 13. Reference to Chapter 12, however, does 

not support their argument. 

First, analogizing Chapter 12 to allowing home mortgage modification in Chapter 13 is particularly inapt because, as a practical 

matter, Chapter 13 filings dwarf Chapter 12 filings. In the twelvemonth period ending in June 2008 there were 344,421 Chapter 13 

filings compared to only 314 Chapter 12 filings. 

Second, during the Clinton administration the Department of Agriculture concluded that Chapter 12 ‘‘may have substantially increased costs for farm businesses.’’ 22 According to that study, 

A conservative estimate of the incremental impact of 

Chapter 12 over Chapter 11 is that it raises indirect bankruptcy costs by about a fourth. To offset the costs Chapter 

12 imposes on creditors, interest rates to farm borrowers 

will rise 0.25-1.0 percent on average. Much higher costs 

will be borne by financially weaker farm borrowers, either 


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23 Id. 24 Id. at 5. 

in the form of increased interest or other charges, or in 

their inability to obtain loans at any price.23

Moreover, the study also found that, 

The major marginal effect of Chapter 12 is to encourage both 

inefficient farmers who would otherwise liquidate and efficient 

farmers who would otherwise continue their operations at 

greater expense to reorganize their businesses under the protection of bankruptcy. These provisions increase direct bankruptcy costs by encouraging bankruptcy filings by some farmers who would not otherwise have done so. They also increase 

indirect costs by increasing the number of farmers who choose 

to reorganize inefficient farms. This impact could be mitigated 

by allowing lenders the option of recapturing writedowns in secured debt if asset values recover. Such an option exists under 

Chapter 11.24

Thus, it is clear that the argument that ‘‘allowing cram-down in 

Chapter 12 has not had negative effects and therefore we should 

extend cram-down to mortgages on principal residences in Chapter 

13’’ is incorrect. According to the Clinton Agriculture Department, 

Chapter 12 has increased borrowing costs especially for marginal 

borrowers and encouraged farmers that otherwise did not need to 

file for bankruptcy to file. 

3. Subprime and non-traditional loans 

In the last Congress, this Committee favorably reported H.R. 

3609, a bill that provided for bankruptcy modification of principal 

residence mortgages, with a manager’s amendment that limited the 

bill to subprime and non-traditional loans. Members of the majority 

rejected this limitation at the mark-up of H.R. 200 because they asserted that the crisis has now spread beyond subprime and nontraditional loans. The foreclosure numbers, however, do not bear 

this argument out. 

According to the Mortgage Bankers Association, there are currently 52 million mortgage loans. Of these 52 million loans, approximately 34 million are prime fixed-rate mortgages, 7 million 

are prime adjustable-rate mortgages (ARMs), 3 million are 

subprime fixed-rate mortgages, 3 million are subprime ARMs, and 

5 million are FHA/VA loans. Thus, the majority of these loans are 

prime-fixed rate mortgages and the vast majority of these loans are 

not subprime. 

The Mortgage Bankers Association data on foreclosures started 

indicates for these loan types that foreclosures were started in the 

third quarter of 2008 for: 0.34% of prime fixed-rate mortgages, 

1.77% of prime ARMs, 2.23% of subprime fixed-rate mortgages, 

6.47% of subprime ARMs, and 0.95% of FHA/VA loans. Thus, the 

worst performing loans are subprime fixed-rate and subprime adjustable-rate mortgages. The 34 million prime-fixed rate mortgages, 

which account for 65 percent of all existing mortgages, are only 

seeing foreclosure starts at 0.34%. FHA/VA loans are also seeing 

foreclosure starts at less than 1%. Yet, both prime and FHA/VA 


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mortgages would be eligible for bankruptcy modification if H.R. 200 

is enacted. 

Given the relatively low percentage of foreclosure starts among 

prime and FHA/VA loans, it would seem that limiting this bill to 

subprime and non-traditional loans is a more than reasonable limitation. When one considers the above-discussed costs imposed by 

this bill and the moral hazard associated with it, there seems to 

be little reason not to limit the coverage to what are still the most 

problematic loans. 

CONCLUSION

Allowing for modification of principal residence mortgages in 

bankruptcy comes with too many attendant costs and the failure 

rate of Chapter 13 bankruptcies is much too high for it to be considered a practical approach to stopping foreclosures. Proponents of 

H.R. 200 assert that everything else has been tried and that nothing has worked to put an end to the foreclosure crisis. They assert 

that allowing bankruptcy mortgage modification is the linchpin to 

effective foreclosure relief. However, there are many better alternatives that have yet to be tried—alternatives that do not present 

the parade of horribles and hundreds of billions of dollars of downside risk threatened by this cram-down bill. The Congress and the 

Executive Branch must try these alternatives before rushing to 

bankruptcy as the answer. And, if in the end bankruptcy relief 

must be an option, it must be crafted along the lines of the rejected 

Republican amendments from the mark-up of H.R. 200, so that it 

is narrowly targeted at the loans at the heart of the current crisis. 

LAMAR SMITH. 

F. JAMES SENSENBRENNER, JR. 

HOWARD COBLE. 

ELTON GALLEGLY. 

BOB GOODLATTE. 

DANIEL E. LUNGREN. 

DARRELL E. ISSA. 

J. RANDY FORBES. 

STEVE KING. 

TRENT FRANKS. 

LOUIE GOHMERT. 

JIM JORDAN. 

TED POE. 

JASON CHAFFETZ. 

TOM ROONEY. 

GREGG HARPER. 

Æ 


wwoods2 on PROD1PC60 with REPORTS