Durbin Bill to Help Homeowners Avoid Foreclosure Set for Debate in Senate

Press Release

Durbin Bill to Help Homeowners Avoid Foreclosure Set for Debate in Senate

Hundreds of thousands of homeowners would be able to modify their mortgages in bankruptcy to avoid foreclosure if legislation offered by United States Senator Dick Durbin (D-IL) were signed into law.

The provisions of Durbin's bill have been folded into the Democratic foreclosure prevention package introduced last week and scheduled to be debated when the Senate reconvenes the week of February 25.

"Home ownership is a pillar of our economy, and an integral part of the American dream. But the headlines that have filled the newspapers lately have described a nightmare. Thousands of families are losing their homes, and millions more are at risk of foreclosure. Whatever the reason that families may find themselves unable to pay their mortgages, the effect of foreclosure is the same: disaster for the family, for the surrounding neighborhood, and for the economy," Durbin said.

The Congress recently passed in bipartisan fashion - and the President quickly signed - an economic stimulus bill that will help kick-start the economy. Improvements made in the Senate version of the bill ensured that seniors and disabled veterans would benefit from the stimulus package. Illinois residents should be receiving checks worth $4.8 billion starting as early as May.

Illinoisans in danger of losing their homes will also benefit from $180 million in additional federal funding for housing counseling services like those offered by the Central Illinois Organizing Project (CIOP) and METEC. The funding was included in the omnibus appropriations bill signed into law by the President in December 2007.

The collapse of the subprime mortgage market has put approximately 2.2 million families in danger of losing their homes. Durbin's bill, The Helping Families Save Their Homes Act, will allow these families, as a last resort, to file for Chapter 13 bankruptcy and work with a judge and the lender to modify the mortgage so families can make affordable payments and keep their homes.

"The law should give American families facing foreclosure the opportunity to negotiate a workout on their mortgages. This bill may help them reach a degree of financial stability -- even when the market cannot," Durbin said. "Small changes to an outdated bankruptcy code could help over 600,000 at risk families keep their homes, while affordably paying back their obligations. We should be giving families every reasonable tool to ensure they can keep a roof over their heads."

Today, virtually every type of personal debt, including vacation homes and family farms, can be restructured in bankruptcy with the exception of mortgages on a primary residence. This exception dates to the 1970's, when most mortgages were fixed rate, long term agreements between local bankers and their neighborhood customers.

The mortgage market has changed considerably since the 1970's, such that mortgages on primary residences are often now the primary cause of financial distress. This bill would help the bankruptcy code catch up with this shift. According to the Center for Responsible Lending, approximately 638,000 families - over 25% of those at risk - would save their homes under Durbin's bill.

To help families save their homes, the Durbin bill would:

* Eliminate a provision of the bankruptcy law that prohibits modifications to mortgage loans on the debtor's primary residence, so that primary mortgages are treated the same as vacation homes and family farms.
* Extend the time frame debtors are allowed for repayment, to support long-term mortgage restructuring.
* Waive the bankruptcy counseling requirement for families whose houses are already scheduled for foreclosure sale, so that precious time is not lost as families fight to save their homes.

To further help families get back on their feet financially as they go through bankruptcy, the bill would also:

* Combat excessive fees that are sometimes charged to debtors in bankruptcy.
* Maintain debtors' legal claims against predatory lenders while in bankruptcy.
* Reinforce that bankruptcy judges can rule on core issues rather than deferring to arbitration.
* Enact a higher homestead floor for homeowners over the age of 55, to help older homeowners who are fighting to keep their homes as they go through bankruptcy but live in states with low homestead floors.
* Reinforce that consumer protection claims are still available in bankruptcy.

Durbin's bill has received broad support from groups which include: AARP; AFL-CIO; Consumer Federation of America; Consumers Union; NAACP; National Association of Consumer Bankruptcy Attorneys; National Council of La Raza; National Fair Housing Alliance; National Urban League and SEIU.

The effects of foreclosure are widespread. The U.S. Conference of Mayors recently issued a report projecting that the foreclosure crisis will result in 524,000 fewer jobs being created this year, a drop in consumer spending, a loss of billions in tax revenues, and slower growth of the U.S. GDP.

Initial claims for unemployment insurance in Illinois were up 12% last week, and the unemployment rate in Illinois has reached 5.5%, much higher than the national unemployment rate of 5%.

In Illinois, which is likely to become the fourth worst hit state in the country when it comes to the foreclosure crisis, the Center for Responsible Lending estimates that nearly 45,000 homes will be lost to foreclosure, over 2.5 million neighboring homes will experience devaluation, and the overall loss in home value (and the tax base) will exceed $15 billion.

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