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What The Mortgage Bill Could Mean To You

4840261A bill that would allow struggling homeowners to get lower mortgage payments by filing for bankruptcy passed the House yesterday by a vote of 234-191. It is expected to face a rougher path towards approval in the Senate.

There was a mounting sense of urgency driving the legislation's passage. A survey by the Mortgage Bankers Association released Thursday reported that 12 percent of homeowners were in foreclosure or behind on payments. This number is likely to get worse as more Americans join the unemployment rolls. The government announced this morning that over 650,000 jobs were lost over the month of February .

The support of key Democrats was personally solicited by housing secretary Shaun Donovan, who assured wary house members that the bill was a critical component of the president's $75 billion housing initiative. A compromise was reached between moderate and liberal congressmen to prevent homeowners from seeking more favorable mortgage terms through bankruptcy unless they have first tried to reach a deal with their lenders, reports the Associated Press.

Many Republicans are opposed to the measure. They claim that it will encourage lenders to raise rates to offset losses they will suffer if more homeowners renegotiate their loan payments through the bankruptcy courts.

Below Associated Press Writer Julie Hirschfeld Davis answers questions about how yesterday's legislation could apply to you if it passes the Senate and is signed by President Obama:

Q. Who is eligible?

A. Any homeowner who can show he can't afford his mortgage and can prove he has sought new terms from the company holding the mortgage. Congressional budget analysts have estimated that it could help 350,000 families over the next 10 years. Senators are discussing limiting the legislation still further, to only certain types or sizes of loans.

Q. What would a borrower have to do before filing for bankruptcy?

A. The borrower would have to call the mortgage holder known as the loan servicer seeking a change in terms, and provide his financial information including income, expenses and debts.

Q. How long would it take?

A. The homeowner would have to wait 30 days to give the mortgage company time to offer new loan terms. Then he could file for bankruptcy under Chapter 13.

Q. If the mortgage company offered a workout, can a homeowner still seek one under Chapter 13?

A. Yes, but the judge could consider whether the loan servicer already offered a reasonable rewrite. The bill defines that as a deal that would bring the homeowner's monthly payment down to about one-third of his gross income.

Q. Can't bankruptcy judges already change the terms of home mortgages?

A. No. Under current law, bankruptcy judges can restructure any type of loan including for cars, college and vacation property. They cannot now restructure mortgages on primary residences.

Q. What if you lied on your mortgage application?

A. The measure doesn't bar people who got their loans in the past without submitting complete or accurate financial documentation. However, the homeowner would be required to give the bankruptcy court a good-faith plan, including proper documentation, for repaying his debts.

Q. What if the homeowner sells his home soon after declaring bankruptcy?

A. The lender would get a substantial cut of the proceeds from a sale of the home if the homeowner sold soon after finalizing his bankruptcy plan. The mortgage company would get 90 percent for a sale within one year, 70 percent after the second year, and half after three years. The amount falls over time to 10 percent in the fifth year.

Q. Does the bill help people who aren't bankrupt but are having a hard time making their mortgage payments?

A. No. The bill offers no direct help to people who can afford their monthly mortgage payments. Proponents believe it will help all homeowners by prodding lenders to negotiate with borrowers rather than let a bankruptcy judge rewrite the terms. Critics argue that it will hurt homeowners and would-be homeowners by prompting mortgage companies to raise interest rates to cover losses they might suffer if their loans are subject to judicial changes.

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