The Dodd-Shelby Amendment (S.A. 1018)
Summary and Background
On April 30, 2009, the Senate will begin consideration of S.896, the Helping Families Save Their Homes Act of 2009, which contains the provisions of H.R.1106 (the House version of the legislation), without the provisions dealing with mortgage modifications in bankruptcy court.
As soon as floor consideration begins, Senator Durbin will offer an amendment dealing with bankruptcy modifications. The Durbin Amendment would allow homeowners at risk of foreclosure to modify their primary mortgage loan in bankruptcy court if, and only if, they have not received a reasonable offer to modify that loan from their mortgage servicer. This plan would thereby create an incentive for servicers to voluntarily restructure failing mortgages in an effort to keep families in their homes. Aggressive and fair foreclosure prevention is a necessary step in our nation’s effort to stabilize families, neighborhoods, banks, and the broader economy. According to Moody’s Economy.com and the Center for Responsible Lending, this plan would prevent 1.7 million mortgages from falling into foreclosure and preserve over $300 billion in home equity for neighboring homeowners. The Senate is expected to vote on this amendment on April 30.
After consideration of the Durbin Amendment, Senators Dodd and Shelby will offer a substitute amendment to S.896 that will expand the number of tools available to prevent home foreclosures. The Dodd-Shelby amendment would:
· Expand the ability of FHA and USDA to modify loans;
· Expand access to the HOPE for Homeowners Program (H.R.4H);
· Create more enforcement tools for FHA to eliminate bad lenders;
· Provide a safe harbor for servicers that either modify a loan consistent with the Obama Administration’s “Housing Affordability and Stability Plan” or refinance a borrower into a H.R.4H loan;
· Authorize an additional $127.5 million for foreclosure prevention activities;
· Extend the $250,000 deposit insurance level for four years;
· Increase borrowing authority both for the FDIC and the NCUA;
· Stretch out the payment of assessments to rebuild the bank, thrift, and credit union deposit insurance funds to eight years; and
· Improve the FDIC’s systemic risk special assessment authority.
This bulletin summarizes the Durbin and Dodd-Shelby Amendments to S.896.
The S.A. 1014would, under the limited circumstances described below, permit primary mortgage modifications in bankruptcy court.
Terms. Courts could only reduce the loan principal to fair market value, reduce the interest rate to the conventional rate plus a reasonable premium for risk, and lengthen the term to the longer of 40 years reduced by the period for which the mortgage has been outstanding or the remaining term of the mortgage.
If the loan principal is reduced in bankruptcy, the amendment would require the borrower to evenly split any price appreciation with the lender up to the original principal amount if the home is sold while the borrower is still in bankruptcy. These bankruptcy provisions would sunset when the Obama Administration’s “Housing Affordability and Stability Plan” ends in 2012.
Limitations. Only primary mortgages originating before January 1, 2009, with outstanding principal less than $729,750, that are at least 60 days delinquent, and for which a foreclosure notice has been sent could be modified in bankruptcy.
A mortgage servicer could prevent a primary mortgage loan from being modified in bankruptcy court if the servicer provides: 1) a modification offer that complies with the “Homeowner Affordability and Stability Plan” to reduce the family’s monthly payment to 31 percent or less of their income; OR 2) a refinancing offer that complies with the Hope for Homeowners program, as modified by the Dodd-Shelby Amendment to S.896. Low-income borrowers must be offered a more aggressive modification.
Summary of the S.A. 1018, the Dodd-Shelby Amendment to S.896
Prevention of Mortgage Foreclosures
The S.A. 1018 would expand the ability of the Federal Housing Authority (FHA) and the Department of Agriculture (USDA) to modify loans. The amendmentwouldauthorize the Department of Housing and Urban Development (HUD) and USDA to give servicers of FHA or USDA loans the opportunity and the incentive to participate in President Obama’s “Homeowner Affordability and Stability Plan” loan modification program or to otherwise modify the loans in ways that are not presently available to distressed homeowners, including reducing interest rates, reducing principal, or stretching out the term of these government-insured loans.
The Dodd-Shelby Amendmentwouldalsoauthorize an additional $127.5 million in funding to assist individuals to better withstand the current mortgage crisis. This funding would be used for foreclosure prevention activities including counseling, additional fair housing field employees, and advertising funds to help prevent people from falling victim to foreclosure scams.
Foreclosure Mitigation and Credit Availability
Safe harbor for mortgage loan modifications. In order to reduce the number of foreclosures and to stabilize property values, local economies, and the national economy, the Dodd-Shelby Amendmentwould protect servicers from lawsuits if they perform loan modifications according to specific criteria established under the legislation. This safe harbor would only benefit servicers that provide modifications consistent with President Obama’s housing plan. The amendment also ensures that H.R.4H refinances are covered.
Expanded access to the HOPE for Homeowners (H.R.4H) Program. The H.R.4H program is a part of the Housing and Economic Recovery Act of 2008 (P.L. 110-140), comprehensive housing reform legislation that was enacted last summer. To make it more user-friendly and effective, the Dodd-Shelby Amendmentwouldmodify the 4H.R.4 program by:
- Lowering fees;
- Streamlining borrower certification requirements;
- Giving the Secretary of Housing and Urban Development limited discretion to determine amount and distribution of future appreciation;
- Banning millionaires from the program; and
- Allowing for incentive payments to servicers and originators to participate in the program.
Enforcement tools for FHA to eliminate bad lenders. The Dodd-Shelby Amendmentwouldempower HUD to more expeditiously drop lenders that break FHA rules, including authorization for HUD to:
- Go after lenders that break the rules but then withdraw from the FHA program to avoid enforcement actions;
- Crack-down on misuse of FHA insurance issued on mortgages originated through unapproved third party entities; and
- Impose penalties on entities that misuse FHA or Ginnie Mae designations.
Enhancement of liquidity and stability of insured depository institutions.
The Dodd-Shelby Amendmentwould:
- Extend increased deposit insurance level for four years. Deposit insurance has been a stabilizing force in the country’s banking system since its inception in 1933 by preventing bank runs in time of economic stress. The Emergency Economic Stabilization Act (P.L. 110-343) increased deposit coverage from $100,000 to $250,000 per account through the end of 2009. The Dodd-Shelby Amendmentwould extend the higher deposit insurance limit for banks, thrifts, and credit unions to 2013.
- Increase the borrowing authority both for the FDIC and the NCUA. The Dodd-Shelby Amendmentwould increase the permanent borrowing authority of the Federal Deposit Insurance Corporation (FDIC) (to $100 billion) and National Credit Union Administration (NCUA) (to $6 billion). S. 896 would also establish temporary additional borrowing authority ($500 billion for the FDIC and $30 billion for the NCUA) to which the regulators may gain access only with a two-thirds vote of the FDIC or NCUA, a two-thirds vote of the Federal Reserve Board, and the agreement of the Secretary of the Treasury, in consultation with the President.
- Improve the FDIC’s systemic risk special assessment authority. To expand the benefits of the government’s systemic risk authority, the Dodd-Shelby Amendment would allow the FDIC (with the Treasury Secretary’s concurrence) to directly assess bank holding companies if they stand to benefit from the government’s actions and correspondingly to reduce costs to community banks.
The Dodd-Shelby Amendmentwouldestablishthe Nationwide Mortgage Fraud Task Force in the Department of Justice. The Task Force would be required to address mortgage fraud, with:
· Initiatives to enforce state mortgage fraud laws and other related federal and state laws;
· Training with respect to mortgage fraud;
· Collection and dissemination of data with respect to mortgage fraud.
The Task Force could also: 1) initiate and coordinate mortgage fraud investigations; 2) establish of a toll-free hotline related to mortgage fraud reporting and information; 3) create a database with respect to suspensions and revocations of mortgage industry licenses and certifications to facilitate the sharing of such information by the states; 4) make recommendations related to resources necessary to combat mortgage fraud; and 5) propose legislation to address mortgage fraud.
The Dodd-Shelby Amendmentincludes a Sense of the Congress on foreclosures that states that, unless foreclosure mitigation provisions have been implemented and determined to be operational, “mortgage holders, institutions, and mortgage services should not initiate a foreclosure proceeding or a foreclosure sale on any homeowner” with respect to a first mortgage secured by the owner’s principal dwelling.
On April 30, 2009, the Senate will begin consideration of the S.896, the Helping Families Save Their Homes Act of 2009, which contains the provisions of H.R.1106 (the House version of the legislation), without the provisions dealing with mortgage modifications in bankruptcy court.
The Senate is expected to focus its debate on the Durbin Amendment, which contains bankruptcy provisions, and the Dodd-Shelby Substitute Amendment, which will replace the text of S.896.
Amendments are expected to the Dodd-Shelby Amendment to S.896. The DPC will distribute information on amendments as it becomes available to staff listservs.
At the time of this writing, no Statement of Administration position has been issued for H.R.1106, S.896, the Durbin Amendment, or the Dodd-Shelby Amendment. The Obama Administration has, however, been supportive of Congress’s efforts to fulfill the Administration’s “Homeowner Affordability and Stability Plan.” The details of this plan can be found at http://www.financialstability.gov/.
Democratic Policy Committee, Democrats are Making Urgently Needed Investments in Housing and Community Development, available here.
Congressional Research Service, Government Interventions in Financial Markets: Economic and Historic Analysis of Subprime Mortgage Options (RL34423).
Congressional Research Service, National Credit Union Share Insurance Fund (NCUSIF): Credit Union Deposit Insurance (RS22987).
Congressional Research Service, Preserving Homeownership: Foreclosure Prevention Initiatives (R40210).
Congressional Research Service, The Primary Residence Exception: Legislative Proposals in the 111th Congress to Amend the Bankruptcy Code to Allow the Strip Down of Certain Home Mortgages (RL34301).
Congressional Research Service, The Process, Data, and Costs of Mortgage Foreclosure (RL34232).
Congressional Research Service, Troubled Asset Relief Program and Foreclosures (R40224).