(WOMENSENEWS)–In the face of a mounting foreclosure crisis–nearly 2,900 families are currently losing their homes each day–the Senate is considering a high-stakes bill this month that may enable as many as 12 million homeowners to keep their homes and pay back debts over time.
Financial advocacy groups say that the Helping Families Save Their Homes in Bankruptcy Act would be a lifeline for women who obtained subprime loans, which carry higher interest rates than traditional mortgages. Many of these women now face foreclosure because higher interest rates, which may readjust every few months, have added hundreds of additional dollars in monthly payments.
A gender analysis of 10 million mortgages in 2007 conducted at the request of Women’s eNews by the Chicago Reporter, an investigative magazine that covers the Chicago area, found that female borrowers are almost twice as likely to hold subprime loans as male borrowers.
The bill, passed by the House March 5, faces stiff opposition in the Senate where it has languished since the fall of 2007. Lobbyists for the mortgage industry claim that the act rewards irresponsible homeowners who took out mortgages they could not afford and are now seeking protection from the bankruptcy courts.
"Not so," said Robert Day, a staff attorney with the Detroit-based Legal Aid and Defender Association, the largest provider of legal services for low- and moderate-income people in Michigan. "Our case files are filled with examples of homeowners facing foreclosure because of some unforeseen circumstance, like unemployment or illness, and who have made tremendous sacrifices like going without medical care to meet their mortgage payments."
Women Faced Unscrupulous Lenders
Many women should never have received subprime loans, said Day. Some had adequate credit scores to qualify for conventional mortgages but were duped by unscrupulous brokers who earned lucrative bonuses for steering them into high-cost loans.
"Others are middle-aged single women stuck in low-wage jobs or elderly women living on Social Security who took out subprime loans to remain in their homes and are now unable to afford the interest rates that adjust every few months, let alone the balloon payments and other expensive features added by predatory lenders."
Rep. Brad Miller, the North Carolina Democrat who helped spearhead the legislation in the House, said the bill is designed to make monthly payments more affordable by giving bankruptcy judges the option of lowering the interest rate on a troubled mortgage to as low as 2 percent and capping mortgage payments at 31 percent of the borrower’s income.
"If these changes don’t make mortgage payments feasible, judges may reduce the overall amount of the loan to the current market value of the home," said Miller in a telephone interview. "This is an important option that takes into consideration the fact that home prices have declined by more than 20 percent since their peak in 2006. As a result, an estimated 1 in 5 homeowners is ‘underwater,’ owing more on their mortgage than the home is worth, which increases their risk of re-default."
Studies have found that lowering the principal–a process known as "cram-down"–is critical because many homeowners who are underwater re-default following another financial setback even if their interest rates have been reduced. Lowering the principal gives these borrowers an equity cushion in their homes that they can tap to stay afloat until they find a new job or regain their financial footing.
To compensate the lender for the cram-down, the bill allows the lender to recover some of the funds if the homeowner later sells the property for a profit.
Obama’s Stick-and-Carrot Tactic
Financial advocacy groups predict that the bill will provide the stick to accompany President Barack Obama’s $75 billion carrot to encourage lenders and mortgage services to modify troubled loans voluntarily. One incentive is a $1,000 upfront payment to lenders that modify loans. If the lender reduces the mortgage to 38 percent of a borrower’s income the government may match additional payments to further limit the monthly payments to 31 percent of a borrower’s income.
"We would be able to help at least 60 percent of our clients because more lenders would be willing to voluntarily modify mortgages if they knew that they would face a judge in bankruptcy court who could make changes in the principal," said Michael van Zalingen, director of homeownership services at the Neighborhood Housing Services of Chicago, a nonprofit organization that creates opportunities for people to live in affordable homes.
The bill would be a lifeline for the organization’s typical client: a 35-to-45-year-old Latina or African American woman who earns $25,000 to $45,000 a year.
"These women are deeply committed to preserving their homes because they view ownership as the entry to the middle class," van Zalingen said. "It will take another generation for the family to secure a home if they lose the home now."
"Relief for homeowners can’t come too soon," said Carey Ebert, president of the Washington-based National Association of Consumer Bankruptcy Attorneys, an organization of more than 3,500 lawyers. "Over the next 12 months, the interest rates on $1 trillion of adjustable rate mortgages will be resetting. We are seeing foreclosures in states like Texas that had managed to escape the crisis."
Shifting Winds Behind the Bill
The political climate has shifted since the end of the Bush administration, which strongly opposed the bill. The Democratic-controlled Congress seems more inclined to grant relief to homeowners, increasing the likelihood that Obama, who supports the bill, will sign the legislation. In the 234-191 vote in the House, however, 24 Democrats crossed party lines to oppose it and the votes of seven Republicans who supported it were critical to its passage.
Winning support in the Senate is more difficult, however, because some Senate Republicans have opposed the legislation because they believe it will eventually raise mortgage costs for all borrowers.
Sen. Dick Durbin, the Illinois Democrat who reintroduced the Senate bill in January, said that one of the strongest arguments for it is the bill’s closure of a loophole that currently allows bankruptcy judges to make adjustments to loans for second homes and investment properties but not primary residences. This loophole harms homeowners whose mortgage payments on their primary residences remain so high that they will never be able to pay off their debts and eventually lose their homes.
"This change would be a major benefit for women," said Ebert, who is a partner in the Ebert Law Firm in Hurst, Texas. "During my 20-plus years of practice, I’ve seen many single mothers who were desperate to hold on to their homes so that their kids would have a safe place to grow up lose their property, while other people retained their vacation homes, commercial real estate and boats."
The debate in the Senate arrives as the number of personal bankruptcies has soared: more than 1 million filings in 2008, the most since a rewrite of the bankruptcy laws went into effect in 2005.
"The act won’t help everyone who is facing bankruptcy because of the foreclosure crisis, but it will help thousands get back on their feet and enable the country to cope with the greatest economic crisis since the Great Depression," said Judge Louise DeCarl Adler, who has served as a bankruptcy judge for the Southern District of California in San Diego since 1984.
Sharon Johnson is a New York freelance writer.
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