Yesterday Citigroup, a major player in the home mortgage market, agreed to support legislation (Senate Bill 61 and House Bill 200) that would allow consumers that file Chapter 13 bankruptcy to reduce their interest rates, change them from Adjustable Rate Mortgages (ARMs) to fixed rate loans, extend the term of the mortgages to 40 years, and "cram down" the principal amount of the loans to the value of the house, if the value is less than the amount owed.

Whew! This could save the homes of many thousands of homeowners, who signed the "toxic" or predatory mortgages that were being offered in the last few years of the "housing bubble." These are the mortgages that started out at a low "teaser" rate of interest, and then usually after two years, become "adjustable rate" or ARM loans where the interest rate varies with an index, plus the addition of several extra interest rate points. I have seen these mortgages where the interest rate was 14%, up to 16%. It's like having a credit card interest rate on a house.

The folks that I have seen put into these loans were usually first time home buyers, or other folks with marginal credit and/or not enough income to qualify for a standard loan. They were often told that after two years, they could refinance, but now that the two years are up, we are in the middle of a "credit crunch," and they can't refinance. Or, their credit is still bad, and they couldn't have refinanced anyway without fixing their credit.

The only conditions for the agreement are: (1) the provision will apply to existing loans only; (2) homeowners would be required to certify that they attempted to contact their lender regarding loan modifications before filing for bankruptcy unless the petition is filed less than 30 days before a foreclosure sale; and (3) Limits to the Truth in Lending Act under certain circumstances.

Overall it is an excellent bill, and for the sake of my clients I sure hope it passes. It could save some of them many, many thousands of dollars and literally allow them to stay in their homes, instead of losing them and walking away, making this recession worse for all of us. In fact, I am going to Washington in February with a group from the National Association of Consumer Bankruptcy Attorneys (NACBA) to lobby for it. Anyone care to comment on this proposed law? Some people think it's unfair to those who pay their bills on time and don't default. But if we don't do something, a lot of people will lose their houses, hurting all of us. Opinions?

J Thomas Black
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Board Certified, Consumer Bankruptcy Law- Texas Board of Legal Specialization
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