Senate Majority Whip, Dick Durbin (D-Ill.), has renewed a pledge to again introduce legislation affording bankruptcy judges the power to modify and otherwise restructure home mortgage loans.  The senator’s last effort failed by 15 votes last April. Durbin’s bill, which is opposed by the mortgage lending industry, would be a welcome tool by debtors who need to restructure their home loans.

Durbin’s new bill might contain ”bank sweeteners” such as affording homeowners extra time to stay in their homes by letting them pay lenders reduced installment payments pending foreclosure.  Presently, in Indiana and many other states nationwide, it’s taking eight months or longer for lenders to foreclose mortgages. Generally, after a lender accelerates and makes demand on a note, the lender will no longer accept installment payments. Consequently, Debtors have been able to stay in their homes without paying their mortgage debt until the sheriff’s sale is completed. Apparently, Durbin may seek to change this practice with his new legislation.

Senator Durbin believes there should be federal funds for cities that implement mandatory mediation between parties to foreclosure proceedings. Further, Durbin posits that those banks failing to significantly contribute to the administration’s goal of 500,000 loan modifications by November 1, 2009 should be penalized. One of those penalties could be a cramdown option, in which judges would lower a loan amount to the fair value of the debtor’s home.

We will be following this legislation closely as it affects many of our clients and prospective clients..