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Published: March 2008

The Foreclosure Prevention Act

Coalition: Mortgage Coalition

Consumer Action joined in a letter to Senator Harry Reid in support of S.2636, the Foreclosure Prevention Act, which would help thousands of people save their homes by extending an existing bankruptcy safety net to include loan modifications for primary residences.

Update: On April 11, the Senate failed to pass the bankruptcy portion of this bill. The Consumer Coalition has refocused its efforts on its passage in the House of Representatives.

We are writing to commend you and your colleagues for recognizing the urgency of the housing foreclosure crisis facing this country and for proposing a comprehensive legislative approach to help stem it.  We are supportive of S. 2636, the Foreclosure Prevention Act, and in particular want to emphasize our support for Title IV, which will allow for modification of home mortgages in bankruptcy. The court-supervised modification provision is a commonsense solution that will help families save their homes without any cost to the U.S. Treasury, while ensuring that lenders recover at least what they would in foreclosure.  

Predatory lending practices and slumping real estate markets threaten hundreds of thousands of American families with the imminent loss of their homes to foreclosure.  For many families, the triggering event will be a catastrophic rate increase on an inappropriate “exploding” subprime adjustable-rate mortgage loan.  As devastating as foreclosures have been to date, the worst is yet to come.  Foreclosures are expected to accelerate dramatically during 2008, when a large number of loans are scheduled for a rate reset.

This nationwide crisis engulfs not only individual families, but neighborhoods and entire communities, as well.  One solution to this serious problem is to give consumers on the brink of losing their homes more flexibility to restructure their loans in bankruptcy.  The bankruptcy safety net that permits modification of a loan to save a yacht, vacation home, commercial real estate or family farm currently is not an option for a family seeking to save a primary residence.  In a manner that is both fair and also urgently needed, S. 2636 would eliminate this inequity in the treatment of American homeowners.   

It should be understood that the narrowly crafted remedy contained in S. 2636 does not reopen the Bankruptcy Act of 2005.  Rather, it addresses the bankruptcy legislation enacted in 1978 that excludes loans for primary residences from those loans that may be modified in a Chapter 13 bankruptcy.   At that time, mortgage loans were nearly all fixed-interest rate instruments with low loan-to-value ratios and were rarely themselves the source of a family’s financial distress.  This is no longer the case.  Preventing the modification of home loans for primary residences makes no sense in an age of subprime exploding ARMs where the mortgage itself causes financial crisis.  
 
While the various voluntary programs that the industry has announced in recent weeks and months are a welcome acknowledgment of the magnitude of the situation, they do nothing to negate the urgent need for this legislation.   

We applaud you and your colleagues for addressing the foreclosure crisis with the urgency it deserves.  We support the court-supervised modification section of S. 2636 and urge speedy passage of this urgently needed reform.

Lead Organization

Leadership Conference on Civil Rights and the Center for Responsible Lending

Other Organizations

AARP | ACORN | AFL-CIO | Black Leadership Forum | CDFI Coalition | Center for Responsible Lending | Consumer Action | Consumer Federation of America | Lawyers Committee for Civil Rights Under Law | Leadership Conference on Civil Rights | National Association for the Advancement of Colored People (NAACP) | National Association of Consumer Advocates National Association of Consumer Bankruptcy Attorneys | National Consumer Law Center (on behalf of its low-income clients) | National Council of LaRaza | National Neighborworks Association | Opportunity Finance Network | Service Employees International Union | U.S. Conference of Mayors

More Information

Library of Congress - Thomas _ S. 2636

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