The National Association of Consumer Bankruptcy Attorneys (NACBA) put its collective heads together and came up with the Principal Paydown Plan to assist homeowners who file for Chapter 13 Wage Earner bankruptcy. The Principal Paydown Plan was designed to help Chapter 13 debtors avoid foreclosure on their homes by making principal-only payments under a five-year interest-free plan.
Principal Paydown Plan in the U.S. Congress
The NACBA’s Principal Paydown Plan was introduced by Representative Zoe Lofgren (D-CA) late last October at a meeting of 19 members of the U.S. Congress and has been endorsed by many. Congressional members asked that the Federal House Finance Agency (FHFA) exercise its authority and implement the plan to help underwater homeowners avoid foreclosure in a Chapter 13 bankruptcy. The FHFA was asked to require that Fannie Mae and Freddie Mac accept a mortgagor’s Principal Paydown Plan to save the Chapter 13 debtor’s home.
What Is the Principal Paydown Plan?
The NACBA’s Principal Paydown Plan is an exercise in practicality by achieving direct loan relief for those homeowners with government sponsored enterprise (GSE) loans to get their mortgages modified when in bankruptcy. The principal would not be modified, but the interest on that principal would be.
Here’s a quick look at the NACBA’s executive summary on its proposed Principal Paydown Plan for distressed homeowners in Chapter 13:
● Restructure an under-secured mortgage in Chapter 13. This would allow the homeowner to pay down the principal amount due on the loan, reduce the negative equity, and acquire equity faster than is possible under the existing loan agreement.
● Reduce the interest rate to 0% for five years (the longest repayment plan period in a Chapter 13 bankruptcy) so the borrower’s monthly loan payments are all principal.
● Similar to HAMP modifications, the monthly payment amount is calculated at 31% of the homeowner’s gross income.
● When the five-year plan is complete, the homeowner’s remaining principal balance is amortized over 25 years (“at the Freddie Mac survey rate”).
● The bankruptcy judge confirms the Chapter 13 debtor’s eligibility for the five-year Principal Paydown Plan, the feasibility of the proposed monthly payments and, once confirmed, oversees the plan implementation.
● There is no cramdown involved. The homeowner actually pays down the principal amount due on the loan.
● In exchange for five years of interest free mortgage payments, the debtor agrees to a general settlement against the lender and loan servicer for all claims the borrower has “avoiding future title and loan litigation.”
● Use of the plan in GSE Fannie Mae and Freddie Mac owned and insured loans would reduce both taxpayer and federal government liability.
Implementing the Principal Paydown Plan does more than benefit the Chapter 13 homeowner who is underwater on a mortgage. The debtor’s neighborhood and local government also benefit by improved community stability.
FHFA Backs Down Because Plan Wouldn’t Help Enough Homeowners
At first, FHFA acting director Edward DeMarco seemed in favor of implementing the NACBA’s Principal Paydown Plan to help distressed homeowners. DeMarco stated that the plan was “being responsible” and was a “credible way to address the crisis while recognizing various interest mortgaged properties.” In the end, however, the FHFA notified the U.S. Congress that it would not implement the Principal Paydown Plan.
Director DeMarco wrote congressional members stating that, after further investigation, the FHFA determined that the plan should not be implemented. The FHFA didn’t say that the Principal Paydown Plan wouldn’t work. So why was it rejected? Because not enough GSE borrowers would benefit, the FHFA has decided that it was not worth requiring Fannie Mae and Freddie Mac to agree to such plans. In other words it’s just too much of a bother, unless, of course, you happen to be a homeowner facing foreclosure.
Despite the FHFA’s initial rejection, members of Congress are still looking to the FHFA to implement the Principal Paydown Plan. Billy Brewer, president of the NACBA, was clearly disappointed with Director DeMarco’s decision not to require implementation of the plan on GSEs. But Brewer vows to continue building support for the plan to help underwater Chapter 13 homeowners modify their mortgages in a meaningful way.
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