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This week, Representative John Conyers introduced the “Helping Families Save Their Homes Act of 2009” (H.R. 1106) (the “Act”), which has been circulated in advance of a vote by the House of Representatives anticipated as early as today. Additional amendments have been offered to the bill, but it is unclear which, if any, will be incorporated into the final text. It is not expected that the Senate will consider its version of the bill until mid-March.
The Act expands upon the “Helping Families Save Their Homes in Bankruptcy Act of 2009”, which was introduced by Representative Conyers earlier this year. Both bills would amend the Bankruptcy Code to enable bankruptcy judges in Chapter 13 proceedings to modify the terms of (i.e. “cram down”) mortgages secured by principal residences. Current bankruptcy law prohibits modification of mortgages secured by principal residences. For a discussion of the proposed cram down legislation set forth in the prior bill and its potential impact on private-label residential mortgage-backed securities, see Bankruptcy Cramdown and its Impact on Private-Label RMBS.1
The Act replaces the prior bill and new provisions have been added in furtherance of the goal of preventing and mitigating foreclosures as well as ensuring credit availability. This memorandum summarizes certain of the new provisions added by the Act.
Enactment of this provision would appear to provide protection to investors in AAA-rated residential mortgage-backed securities backed by jumbo prime or Alt-A mortgage loans where the securitization included the excess loss feature. While the Act does not expressly state how excess bankruptcy losses should be allocated among security holders where pro rata loss share provisions are rendered unenforceable, the result will likely be that all bankruptcy losses would be allocated in the same manner that other non-“excess” type losses would be allocated, which is typically to the most subordinate securities first.
Supporters of the bankruptcy legislation do not necessarily want to encourage every troubled borrower to file for bankruptcy, which would overwhelm the bankruptcy courts with a significant increase in new filings. Instead, supporters hope the legislation will encourage modification efforts by making owners of troubled mortgage loans (including securitization investors) more amenable to the servicer implementing systematic pre-bankruptcy modifications, including those involving principal forgiveness, rather than risk a more severe principal writedown in a bankruptcy proceeding.
While the threat of cram down under the bankruptcy legislation could be helpful in increasing pre-bankruptcy modifications, some securitization governing documents prohibit all or certain types of modifications or place quantitative limits on the number of modifications. Further, even where the servicer has clear authority to modify loans, the servicer may generally do so only if the modification is in the best interest of investors. Given the limited history of large scale modifications, there is not, as yet, a clearly evolved consensus by market participants about what type of modifications are in the best interests of investors. This lack of consensus may inhibit the willingness of a servicer to pursue modifications resulting in significant payment and/or principal reductions for fear of certain classes of investors suing the servicer. To address such concerns, the Act includes a safe harbor for servicers, a form of which was previously introduced by Representative Barney Frank earlier in this year in H.R. 384.
The Act provides that notwithstanding any servicing contract (including a securitization contract), if a mortgage to be modified (which modification must be initiated prior to January 1, 2012) meets the servicer safe harbor criteria (set forth below), a servicer will not be:
A loan meets the servicer safe harbor criteria if:
Servicers that modify loans meeting the servicer safe harbor criteria will not be liable to:
The Act includes modifications to the Hope for Homeowners Program that are intended to encourage (i) borrowers to participate by reducing fees and (ii) servicers to engage in modifications by providing incentives. Among other changes, the Act:
The Act provides for Federal Deposit Insurance Corporation (“FDIC”) and National Credit Union (“NCU”) insurance to be permanently increased from $100,000 to $250,000 per depositor or member, as applicable, per financial institution. The FDIC’s credit line with the Treasury would be increased to $100 billion and the NCU’s credit line with the Treasury would be increased to $6 billion.
1 Total ASF 2009, February 10, 2009, Lisa J. Pauquette, Frank Polverino and Jordan M. Schwartz. See http://www.cwt.com/assets/article/021009PauquettePolverinoSchwartzTotalASF.pdf.