The U.S. Federal Reserve Board (Fed) announced a new rule aimed at preventing foreclosures as two House committees consider legislation aimed at achieving the same goal.

Home Foreclosure and Bankruptcy Legislation
On Jan. 27, the House Committee on the Judiciary approved—in a 21 to 15 party-line vote—the Helping Families Save Their Homes in Bankruptcy Act of 2009 (H.R. 200). The bill would allow bankruptcy judges to modify existing mortgage loans on primary residences, including reducing the principal of a mortgage so the borrower could stay in the home—a practice commonly known as a “cram-down.”

Currently, this authority is limited to vacation homes and investment property. The bill requires debtors to contact their mortgage lender or service for help at least 15 days before filing for bankruptcy protection and proposing a repayment plan. If the homeowner sells the house, the bill would ensure that the mortgage lender would share in any gain on a sliding scale over the life of the Chapter 13 plan.

In last year’s annual, nationwide NSBA survey of small- and mid- sized businesses, 18 percent of small-business owners who reported having a business loan leveraged their loans with a second mortgage on their home. This was the third largest leverage vehicle, trailing only credit cards and personal savings.

Although no Republicans supported the final bill, the committee did approve an amendment offered by Rep. Steve King (R-Iowa), which restricts the eligibility for loan modification to those debtors who “did not obtain the extension, renewal, or refinancing of credit that gives rise to a modified claim by the debtor's material misrepresentation, false pretenses, or actual fraud.”

Arguing that it would result in higher mortgage interest rates, the bill was opposed by the Financial Services Roundtable, which represents major firms in the banking, securities, investment, and insurance sectors. In a press release, Steve Bartlett, president and CEO of the Roundtable, said, “Cram down injects risk into the housing market, increasing uncertainty in an already unstable housing market…The better solution is for a homeowner to contact the lender directly or one of the many organizations that help homeowners, such as the HOPE NOW Alliance.”

Not all financial-services companies were opposed the measure, however. Citigroup, Inc. previously agreed to support legislation allowing bankruptcy judges to modify the home-mortgage loans of those at risk of foreclosure and received several legislative concessions in return.

Rep. John Conyers (D-Mich.), chair of the Judiciary Committee, said the legislation is “not a bailout or a corporate relief operation… While bankruptcy reform may not provide all of the answers to this [foreclosure] crisis, surely it provides a common-sense and practical approach to helping stop the spiral of home foreclosures….”

It is possible the bill will be included in the Fiscal Year 2009 omnibus appropriations package.

FDIC Increase Legislation
Rep. Barney Frank (D-Mass.), chair of the U.S. House Committee on Financial Services, this week introduced legislation (H.R. 703) that would triple the Federal Deposit Insurance Corporation’s (FDIC) credit line with the U.S. Department of Treasury to $100 billion. In the wake of the recent increase in bank failures, the FDIC’s deposit insurance fund shrunk 24 percent in the third quarter of 2008.

The legislation also permanently increases the FDIC’s deposit insurance to $250,000 per customer. Congress temporarily enacted this increase from the previous limit of $100,000 in Oct. 2008. Additionally, the bill modifies the Hope for Homeowners program—created by Congress last year to help at-risk borrowers to refinance into sub-prime loans that would be backed by the Federal Housing Administration (FHA)—by reducing the annual participation premiums and increasing the amount of the loan that FHA will insure from 90 percent to 93 percent. The program adjustments are intended to make the program more attractive, as thus far only a few hundred borrowers have participated, well below the 300,000 borrowers Congress expected.

The legislation is expected to be approved by the House Financial Services Committee this week.

Fed Foreclosure Policy
The Fed recently announced a new policy aimed at preventing home foreclosures on certain residential mortgage assets held, owned, or controlled by a Federal Reserve Bank. The policy includes such actions as reducing interest rates or principal and will apply to assets that are held as collateral for firms that have availed themselves of the Fed's discount window.

Frank applauded the announcement, calling it “a very big deal.” He said, "That's pretty broad. It's any bank that's in the system."