Most of the action taken by Congress thus far to address the meltdown in the housing market has focused on bailing out large financial institutions.  The House took a step last week that could ease the burden of some homeowners holding troubled mortgages.
On March 6 on a mostly party line vote of 234-191 the House passed H.R. 1106, the Helping Families Save Their Homes Act of 2009, that includes initiatives intended to provide relief for struggling homeowners.  The most controversial provision in the bill would allow bankruptcy judges to adjust downward the principal of a homeowner’s mortgage or reduce the interest rate and extend the duration of mortgages on primary residences – provisions known as “cramdowns.”

The mortgage industry and some in Congress oppose reducing mortgage principals, concerned that it could lead to many more bankruptcy filings.  However, a report from a congressional oversight panel monitoring the $700 billion Troubled Assets Relief Program (TARP) concluded that the threat of bankruptcy could provide incentives for mortgage servicers – the company that sends out the monthly bills – and lenders previously unwilling to negotiate changes to modify loans. To minimize the number of times a threatened bankruptcy becomes real, and to bring enough skeptical Democrats on board to pass the bill, language was modified so that homeowners must demonstrate to the bankruptcy judge that they had first made an effort to work with lenders to adjust their loans. Another change would allow lenders to collect a portion of the profit on a home sold within four years of modification through the courts.

Other provisions in the bill would make permanent the $250,000 limit on deposits insured by the Federal Deposit Insurance Corporation and the National Credit Union Administration and index the limit to inflation beginning in 2015.  The limit was temporarily raised from $100,000 in the TARP bill that passed in the fall and was set to expire in December 2009.  H.R. 1106 also makes changes in the Hope for Homeowners mortgage program passed last year but seldom used because of its restrictions.  Eligibility standards would be reduced so more homeowners qualify and their fees to the Federal Housing Administration would be lowered.  Mortgage servicers could receive up to $1000 for each loan modification and would be shielded from lawsuits brought by investors who are disadvantaged by changes in the mortgage.

Senate action has not been scheduled on H.R. 1106.  Undoubtedly the cramdown provision will face a serious challenge in the Senate.

Many homeowners and some members of Congress have expressed frustration that the lack of action is only deepening the foreclosure crisis.  A new survey by the Mortgage Bankers Association shows that the delinquency rates during the fourth quarter of 2008 on home mortgage loans rose to 7.9 percent, up from 5.8 percent a year ago.  The survey also showed that increasing numbers of homeowners are behind on mortgage payments due to job loss rather than because they have a risky loan.

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