The U.S. House of Representatives approved H.R. 1106, the Helping Families Save Their Homes Act of 2009, by a vote of 234- 191 on Thursday evening. The Act, if approved by the U.S. Senate (see S.61 for the Senate version) and signed by President Obama, gives bankruptcy courts the authority to modify the terms or reduce the principal balance of a homeowner’s mortgage, while protecting lenders from investors when loan terms are altered. More on this developing story from Inman News:

The Senate bill’s sponsor, Sen. Dick Durbin, D-Ill., has said he is considering amending the legislation to restrict bankruptcy judges’ cram-down powers to subprime mortgages.

Critics say changing the bankruptcy code would flood courts with distressed homeowners, and raise the cost of borrowing by introducing new risks for lenders.

Cram-down supporters say those fears are exaggerated, as only those loans made in the past would be eligible for judicial modification, and lenders would step up their efforts to engage in workouts with borrowers to avoid having loan terms re-written in court.

HR 1106 includes language that would provide a legal “safe harbor” for loan servicers who modify loans and expand the scope of the Federal Housing Administration’s “Hope for Homeowners” guarantee program for refinancings.

The Obama administration said it advocates “careful changes” to the bankruptcy code that would subject only those mortgages within Fannie Mae and Freddie Mac’s conforming loan limits to court-ordered modifications.

The Helping Families Save Their Homes Act seeks to help the estimated 7- 9 million households facing possible foreclosure by including key incentives that encourage lenders to renegotiate affordable mortgages for homeowners who are underwater, at risk of foreclosure, and those nearing bankruptcy.

Specifically, the bill fixes the Hope for Homeowners (H4H) program, implemented October 1, 2008, which was designed to get more families into affordable mortgages by:

• reducing current fees that have discouraged lenders from voluntarily participating, and
• offering new incentives for lenders to negotiate loans.

To further encourage participation in this program, the bill protects lenders from lawsuits for modifying loans. This will make reasonable loan modifications available to more homeowners at risk of foreclosure.

To help families who have exhausted options for relief, the bill also allows bankruptcy judges to modify the terms of a loan for existing primary residence mortgages.

Currently, the mortgage for a primary residence cannot be modified in bankruptcy — unlike every other secured debt — including debts secured by second homes, investment properties, luxury yachts, and private jets.

Ralph R. Roberts, GRI, CRS Award-Winning REALTOR® and Author Loan Modification For Dummies (avail. Summer 2009)