By Ryan C. Wood
For more than five years various plans were submitted to our lawmakers to help with the mortgage crisis. The HAMP program is the most widely known. The last big push was to amend the bankruptcy code to allow first mortgages on bankruptcy filers primary residences to be modified when filing a chapter 13 bankruptcy. The first mortgage on a primary residence is the sacred cow in bankruptcy. It cannot be modified. This law change was killed in the Senate though.
The Principal Paydown Plan is the new attempt to help people with undersecured or underwater mortgages get some relief and help them to keep their homes. An undersecured mortgage exists when the value of a house falls below what is owed on the mortgage(s). How does the PPP work?
The PPP would allow homeowners with underwater mortgages to file a chapter 13 bankruptcy and reduce the interest rate on the mortgage to 0% for the term of the chapter 13 plan. Reducing the interest rate to 0% would allow all of the monthly mortgage payment to be applied to the principal owed on the mortgage instead of principal and interest. The monthly mortgage payment could be reduced too. How much the monthly mortgage payment is would be calculated by taking 31% of the bankruptcy filer’s gross income. This is similar to how a modified mortgage payment is calculated in the HAMP program. The maximum length of a chapter 13 plan is five years. So a homeowner would be able to pay down the principal owed significantly over the five years and reduce the negative equity. After the five year chapter 13 plan is complete, then the remaining balance owed is amortized over 25 years at the Freddie Mac survey percentage rate.
In exchange for a mortgage company and/or servicer accepting this treatment in a chapter 13 plan of reorganization, the borrower waives any future right to sue the mortgage company or servicer for title or loan litigation.
The idea is that the homeowner will exit the chapter 13 bankruptcy with a house that is worth closer to what is owed on the mortgages. For some homeowners the value of their home has decreased so much over the last 5 years that no reduction in interest rate will help them obtain equity in their home any time soon. This plan does have limitations, but anything is better than the current loan modification system.