Mortgage Modifications on the Horizon?

By Sean C. Currie

Spring 2009

Debtors in chapter 13 bankruptcies can modify almost all types of debts. They can change interest rates, amortization, and terms of loans. 11 USC §1322(b)(2). They can also “strip down” most secured debts to the value of the collateral. §506. The strip-down process bifurcates an undersecured lender’s claim into a secured claim for the value of the col¬lateral and a general unsecured claim for the deficiency.

In contrast, the Code does not permit modification of mortgage loans secured solely by the debtor’s principal residence. §1322(b)(2). The policy behind this prohibition is that it enables the flow of capital into the home lend¬ing market and, perhaps, reduces the interest rates for the wider public.

In lean economic times, arguments abound on whether the law should dispense with or retain this prohibition on mortgage modification. Opponents of allowing bankruptcy judges to modify mortgage contracts echo the policy above. Proponents of mortgage modification point out that mort¬gage lenders do not fare much better through foreclosure than they would through a mortgage modification.

Although mortgage modification proponents have won over some members of Congress, their effort to amend the Code appears dead, at least for the time being. HR 1106, the Helping Families Save Their Home Act of 2009, would have enabled bankruptcy judges to modify home mortgages for debtors with a five-year chapter 13 repayment plan. The bill passed the House of Representatives but stalled in the Senate, and the Senate defeated a related bill, S. 896.

Here in Oregon, the bankruptcy bench and bar are at work on developing procedures for consensual mortgage modifications in chapter 13. Check in with the Circle of Love for further developments.

This article appeared in the spring 2009 issue of the Oregon State Bar Debtor-Creditor Newsletter.