Published: March 2008

Saving homes through Chapter 13 bankruptcy

Coalition: Mortgage Coalition

Consumer Action joined civil rights and consumer organizations in this letter of support for the bipartisan Chabot-Conyers “Emergency Home Ownership and Mortgage Equity Protection Act of 2007,” which would save hundreds of thousands of homes from foreclosure.

We strongly urge you to cosponsor H.R. 3609, the bipartisan Chabot-Conyers “Emergency Home Ownership and Mortgage Equity Protection Act of 2007.”  As modified by the Committee on the Judiciary, H.R. 3609 is a well-targeted, thoughtful approach that could save hundreds of thousands of homes from foreclosure.

Foreclosure rates are rapidly increasing, due to the proliferation of high-risk loans and lending practices – including “exploding ARM” loans; poorly underwritten “interest-only,” “pay-option,” and “stated income” mortgages; and steering of creditworthy borrowers into expensive subprime loans.  Despite industry-led efforts to avert foreclosures, such as “Project Lifeline” and the “Hope Now Alliance,” countless families remain destined to lose their homes. (See Ruth Simon and Tom McGinty, “Earlier Subprime Rescue Falters: December Plan Has Done Little to Help Borrowers In Dire Circumstances,” Wall Street Journal, Feb. 13, 2008, A3.)

H.R. 3609 would give hundreds of thousands of struggling homeowners a second chance through the means-tested Chapter 13 bankruptcy process.  Bankruptcy courts would be able to 1) reduce the principal on mortgages to reflect the current value of the home, while providing a vehicle for lenders to recover the full fair market value; 2) reset interest rates to affordable-but-fair levels; and 3) eliminate many abusive fees.  Taking a pragmatic approach, the Committee-passed version would only affect existing subprime and nontraditional loans, sunset after seven years, and only apply if foreclosure is imminent.  It would also leave the 2005 bankruptcy reforms intact.

For several reasons, H.R. 3609 represents one of the best responses available to the foreclosure crisis.  One key advantage is its cost.  Because the public would not have to pay to save homes, it would not amount to a "bailout" or raise moral hazard issues.  Indeed, bankruptcy relief would come at a heavy enough private cost to families who file – monetary and otherwise – to encourage wiser financial decisions in the future.

In addition, H.R. 3609 would benefit other homeowners and our economy at large.  Every home that is saved from foreclosure helps protect the value of surrounding homes, making other borrowers less likely to get "upside down" on their own loans.  It would also reduce the blight, public safety hazards, and drains on government resources that inevitably result from widespread foreclosures.  In short, H.R. 3609 would help control the “bleeding,” ideally for long enough to allow the economy to recover on its own.

Opponents of H.R. 3609 claim that it would make credit more expensive.  We certainly take such concerns seriously.  With respect to H.R. 3609, however, that claim has not been substantiated.  Because the Committee-passed version of H.R. 3609 only applies to existing loans in which more-expensive foreclosures are imminent, it is difficult – at best – to see how it would lead to higher interest rates on loans in the future.
While we commend industry-led efforts to reduce foreclosures, we believe that far stronger action is needed to mitigate the ongoing crisis.  Homeowners, and our economy as a whole, simply cannot afford to have the industry that fueled this epidemic – and the corresponding wave of foreclosures – avoid some measure of responsibility for the resolution.

Lead Organization

Leadership Conference on Civil Rights

Other Organizations

AARP | American Association of People with Disabilities | American Federation of Labor – Congress of Industrial Organizations (AFL-CIO) | Asian American Justice Center | Association of Community Organizations for Reform Now (ACORN) | Black Leadership Forum | Center for Responsible Lending | Common Cause | Consumer Action | Consumer Federation of America | Consumers Union | Disability Rights Education and Defense Fund | Hmong National Development | International Brotherhood of Teamsters | International Union, United Auto Workers | Japanese American Citizens League | Laborer’s International Union of North America | Lawyers' Committee for Civil Rights Under Law | Leadership Conference on Civil Rights | Legal Momentum | NAACP Legal Defense & Educational Fund, Inc. | National Association for the Advancement of Colored People (NAACP) | National Association of Consumer Advocates | National Association of Consumer Bankruptcy Attorneys | National Association of Neighborhoods | National Community Reinvestment Coalition | National Council of La Raza | National Education Association | National Fair Housing Alliance | National Federation of Filipino American Associations | National Korean American Service & Education Consortium (NAKASEC) | National NeighborWorks Association | National Organization for Women (NOW) | National Urban League | National Women’s Law Center | Opportunity Finance Network | Organization of Chinese Americans | Service Employees International Union | Unitarian Universalist Association of Congregations | United Food and Commercial Workers International Union | U.S. Public Interest Research Group

More Information

Library of Congress - Thomas _ H.R. 3609

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