The NACBA, or National Association of Consumer Bankruptcy Attorneys, has designed a principal paydown plan with the goal of helping homeowners who are facing foreclosure, and who file for bankruptcy under Chapter 13 as a wage earner. This plan would prevent foreclosure on the home and allow the homeowner to make payments that are fully applied to the principal on the mortgage for 5 years and eliminate any interest during this period.
Representative Zoe Lofgren, a democrat from California, first introduced the Principal Paydown Plan at a meeting where 19 members of Congress were present, and the endorsements for this plan were numerous. The Federal House Finance Agency was asked by Congress to authorize and implement the Principal Paydown Plan so that homeowners who were facing foreclosure and were underwater on their mortgages could get help under Chapter 13 bankruptcy. Congress requested that Fannie Mae and Freddie Mac be required by the FHFA to accept a principal paydown plan during Chapter 13 bankruptcy so the homeowner did not lose their home.
What The Principal Paydown Plan Does
A principal paydown plan allows underwater homeowners facing foreclosure and in Chapter 13 bankruptcy to get modifications to government sponsored enterprise loans because of bankruptcy. The principal of the mortgage would not be changed in any way, but modifications to the interest charged on the principal would be made. The executive summary of the Principal Paydown Plan outlines the following benefits and components:
- Use of the plan in GSE Fannie Mae and Freddie Mac owned and insured loans would reduce both taxpayer and federal government liability.
- 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.
- There is no cramdown involved. The homeowner actually pays down the principal amount due on the loan.
- 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.
- 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.
- When the five-year plan is complete, the homeowner’s remaining principal balance is amortized over 25 years (“at the Freddie Mac survey rate”).
- 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.”
Keeping homeowners in their homes and communities is vital, and the foreclosure and housing crisis has proven this fact. The neighborhood and community where the home is located will have improved stability, and the number of foreclosures that create a blight on certain neighborhoods would drop significantly.
FHFA Refuses To Implement The Principal Paydown Plan
When the Principal Paydown Plan was first released by the NACBA the acting director of the FHFA, Edward DeMarco, was in favor of helping homeowners in distress and facing foreclosure. According to DeMarco the plan was a “credible way to address the crisis while recognizing various interest mortgaged properties.” Ironically Congress was then notified that the FHFA would not implement this plan, and the reasoning for this refusal is astonishing. According to the letter received by Congress “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.” The FHFA refuses to say that the Principal Paydown Plan will not work, in fact all of the evidence points to the contrary. Instead the agency figures that the work involved is too much of a hassle since millions of homeowners will not benefit. If you are a homeowner who is at risk of foreclosure you may feel helpless and alone, but the NACBA will continue to push for mortgage modification assistance with the help of Congress.
If you are a homeowner facing foreclosure or other debt problems we can help. The bankruptcy attorneys at Richard West Law can help provide a free debt consolidation consultation to help you find the right answer for your unique debt problems and circumstances. Visit https://www.debtfreeohio.com or call (513)771-8700 or (937)748-1749 to get the answers you want, and the financial relief you are looking for.