Mortgage Modification Meltdown: When Will Congress Take the Plight of Homeowners Seriously?

Abstract

Since 2007, over two million families have lost their homes, and studies show that many more millions will lose theirs over the next several years. Even though the crisis has impacted all people across the United States, Hispanic and African-American communities have been considered the “ground zero” of this economic catastrophe, and this problem is coupled with the fact that minorities have generally suffered the greatest job losses as well. Although Congress and the mortgage servicing industry have attempted loan modification reform in the past, many of these efforts have not produced effective results. As part of a multi-pronged approach to combat the foreclosure crisis, the Homes Act adds incentives and extra pressures to encourage mortgage servicers to modify loans, instead of foreclosing on residential property. These provisions involve protecting servicers from TILA liability if they enter into “qualified loss mitigation plans” with homeowners, creating additional TILA disclosure requirements to increase transparency in the secondary mortgage market, and offering payments to servicers if they refinance mortgages in cooperation with the Department of Housing and Urban Development (hereinafter “HUD”) through the Hope for Homeowners program. A judicial approach to the foreclosure crisis is also important, but in passing this bill Congress rejected Senator Dick Durbin’s proposed amendments to the Bankruptcy Code that would have allowed U.S. Bankruptcy Judges to modify residential mortgages in the face of impending foreclosure. It is critical for the federal government and mortgage industry to follow through with this legislation that increases consumer ability to modify home mortgages, in addition to promoting potential judicial mortgage modification authority, in order to stabilize the U.S. housing market. Other strategies for mitigating the foreclosure crisis include promoting the spread of financial information, making significant improvements to the standard mortgage contract, and developing new financial consumer products to reduce the strain upon homeowners who face periods of financial distress. This Note starts by addressing the background of the U.S. home mortgage crisis that began in the latter half of 2007, and continues as of the date of this publication. There follows an examination of a few of the major types of mortgages that exist today, some important past legislation regarding home mortgage lending, and previous failed attempts at reform. Next, this Note analyzes the Homes Act to see if it offers a better source of reform, and compares it to a piece of parallel state legislation from New Jersey. This Note concludes by recommending other avenues for home mortgage modification and reform, including the potential for judicial modification via bankruptcy court, and modern pro-consumer financial products that might alleviate the distressful situation affecting millions of Americans today.