Implication of New Cramdown Bill in Nevada. The Balancing Act?
New Bankruptcy Laws may soon go into effect to relieve Las Vegas underwater real estate market. The mortgages may be modified or “crammed down” by Bankruptcy Judges. This of course is a wonderful news for Nevadans who are leading the national figure in bankruptcy and foreclosures.
In the first week of March, 2009, the House of Representatives passed the long overdue Bankruptcy “Cramdown Bill” (a mortgage modification bill) by a vote of 234 – 191, otherwise known as H.R. 1106.
This would be a masterpiece legislation and new egislation will allow Bankruptcy Judges the discretion to modify the mortgage principal balances on primary residences.
This new legislation may bring equity to the modification of secured debt. The following example shows how this new legislation could possibly play out in a Chapter 13 case involving a family from Clark County.
Jimmy and Jill bought a home in Summerlin for $1,000,000.00 in January, 2007. They received a stated income/stated asset loan, and put no money down. They have a 80% first to Countrywide and 20% second to New Century. There is no mentioning of the fact that Countrywide was the most liberal lender who would not care of any kind of the necessity of verification of documents or verification of employment. Two months after the purchase, the Jill was laid off and the Jimmy’s income recently slashed in half due to the economy. Their income went from $15,000 per month now down to $5,000 per month. They have 5 kids and are financing two vehicles. They have amassed $250,000.00 in credit card debt just robbing peter to pay paul and stay in their home. The house is now worth $450,000. They could just walk away from the home and under CC 580b, the lenders could only pursue the property. THERE IS NO RECOURSE AT ALL AGAINST Jimmy AND JILL. So why not walk? In that case, a foreclosure would provide the second $0.00 and the first would receive about $380,000 once all the costs of foreclosure complete its course. Presently, their expenses are as follows:
$5,322.00 First Mortgage
$2,414.00 Second Mortgage
$1,040.00 Property Taxes
$ 500.00 Insurance and HOA fees
$ 650.00 Auto Payment
$ 550.00 Auto Payment
Under current laws, the cars could be reduced to the fair market value, interest rates cut, and loans recast over 60 months. Total payments would go from $1200 per month to $650 per month.
But the substantial changes under the new legislation arise from mortgage modification. The second lien would be entirely removed (this is not new and can presently be done under existing laws). But the new legislation would then allow the first mortgage to be reduced from $800,000 to $450,000. The 6.5% interest rate could then be reduced to 2%. Finally, the $450,000 could be spread over 40 years. The result: $1,363.00. That’s right, their combined mortgage payment could be reduced from $7,736.00 per month to $1,363.00 a month, a savings of $6,373 per month or over $76,000 per year in interest payments!
Additionally, they save $550,000 in principal reduction, eliminate $250,000 in credit card debt, and rewrite the vehicle loans. In all, they go from paying $10,476.00 per month for the home and cars to $2,979.00 for the home and cars, saving nearly $7500 per month. In 5 years, they are then debt free, have the cars paid off, and continue paying the $1,363.00 mortgage payment. Its a no brainer for anyone wanting to save their home from foreclosure. Under the new laws, it seems everyone wins.
This new legislation must still pass the Senate before hitting the President’s desk. Of course there would be some amendments in this bill in Senate. At this time, the Obama’s administration is fully backing this bill. Of course, if this legislation passes in its presently enactment, Clark County’s Real Estate Market will begin to stabilize and flourish. This is simply because “walk aways” will no longer make sense and housing supply will stop increasing. Of course Judges are the best instrumentality to fix this crumbling real estate market. No legislation would have more local impact than the current cramdown bill.