The way that this Paydown Plan could side step the legislative process is by having these key stakeholders mandate the affirmative acceptance of Chapter 13 plans that contain a precise provision detailing and implementing the Paydown Plan. While there is still strong support for the bankruptcy mortgage cramdown, the Principal Paydown Plan can be used as a tool in the absence of legislation to immediately affect a change in the negative equity problem that continues to plague many homeowners.
The Paydown Plan restructures certain under secured (when you owe more on your mortgage than the current fair market value of the property) mortgages in Chapter 13 bankruptcy cases so the homeowner can pay down the loan principal and reduce negative equity and build equity faster than with the existing loan. This is accomplished by reducing the interest rate to 0% for five years (the maximum length of a Chapter 13 Bankruptcy Plan), letting the borrower/debtor’s entire monthly loan payment go directly to the principal. During the five-year period, the minimum monthly housing payment is calculated similar to a HAMP modification payment which projects a payment calculated to be 31% of borrower’s gross income.
The Paydown Plan is scrutinized by the bankruptcy judge and the Chapter 13 Trustee reviews the debtor’s budget to confirm the eligibility of the borrower and feasibility of the payments; and they oversee the implementation of the Chapter 13 Bankruptcy Plan within which the Paydown Plan and the details would be made part thereof. At the end of the five-year period, the remaining principal balance on the first mortgage is re-amortized as a 25 years at the Freddie Mac rate and monthly payment will adjust accordingly
There is no cram down provision in this current initiative currently so there is no need for legislation to amend the current Bankruptcy Code. Moreover the benefit to the borrower is achieved by actually paying down the loan. In exchange for this benefit, the borrower agrees to a general settlement of all claims against the lender and servicer and avoiding future title and loan litigation. The federal government and US taxpayers’ substantial burden on Fannie Mae and Freddie Mac (all GSE) owned and insured loans would be reduced by this plan.
With many homeowners in this state underwater on their principal residence mortgages, the Principal Paydown Plan initiative could achieve principal reduction on certain mortgages. This plan if implemented and accepted, encourages underwater (when you owe more on your mortgage than the current fair market value of the property) homeowners to keep their homes and improves neighborhood stability without the necessity of an act of Congress.
Cynthia A. Riddell is an attorney whose practice primarily focuses on Bankruptcy, Real Estate Foreclosure, Short Sales as well as other debt related matters. She is a member of the Florida Bar and admitted to practice in the U.S. District Court for the Middle District of Florida. She is a member of the National Association of Consumer Bankruptcy Attorneys and the American Bankruptcy Institute. She practices in Sarasota and Manatee Counties. Office phone number 941-366-1300.