By Ryan C. Wood, Attorney at Law
Since the beginning of the mortgage crisis there have been more than a few plans to help troubled homeowners. Unfortunately the only one that is a reality is the HAMP program. HAMP was supposed to help 9 million or more homeowners keep their homes and obtain loan modifications. A better solution would have been to allow homeowners to obtain modification of their first mortgages when filing a chapter 13 bankruptcy reorganization case. First mortgages have always been the sacred cow under the bankruptcy code. They cannot be changed. The push to amend the bankruptcy code to allow for the modification of first mortgages was killed in the Senate.
Now the Principal Paydown Plan (PPP) is the latest proposal to try and reduce the number of homeowners with negative equity in their homes. Having negative equity is typically called having an undersecured or underwater mortgage. An undersecured or underwater mortgage exists because the value of the property or home falls below what is owed on the mortgage(s).
So how can the PPP help? First, the PPP would allow borrowers with negative equity to file a chapter 13 bankruptcy and reduce the interest rate on their first mortgage to 0% for the term of the chapter 13 plan. The advantage of lowering the interest rate to 0% is all of the monthly mortgage payment would then be applied towards principal and not any interest. This would result in the principal owed on the mortgage being reduced by significantly more than if interest were paid also. Second, the actual monthly mortgage payment the borrower would have to pay each month could be reduced to a low as 31% of the borrower’s gross monthly income. The bankruptcy judge would have the final say on how much the monthly mortgage payment would be each month. The reduced monthly mortgage payment with 0% interest being paid could last a maximum of five years, the longest possible chapter 13 plan of reorganization. Once the five years is completed, then the total principal balance left is amortized over 25 years with an interest rate based upon the Fredie Mac survey rate.
So why would mortgage companies and servicers want to agree to this program? As part of the agreement the borrower gives up any future cause of action they may have against the mortgage company or service. This is a big deal given the recent revelation that mortgage companies have forged documents and not serviced mortgage loans properly.
This plan is not perfect and mortgage companies and servicers would voluntarily agree to allow modification of the first mortgages. Hopefully sometime soon the PPP will be a reality and we will have another tool in our belt to help homeowners.