This new proposal, the Principal Paydown Plan, does not require legislation if it is adopted by investors, insurers, and government agencies.  These key stakeholders would mandate the affirmative acceptance of Chapter 13 plans that contain a precise provision detailing and implementing the plan. While NACBA still strongly supports the bankruptcy mortgage cramdown, NACBA offers the Principal Paydown Plan as a tool that can be utilized in the absence of legislation.

The key components of the Principal Paydown Plan are:

• This plan restructures certain undersecured (underwater) mortgages in Chapter 13 bankruptcy cases so the homeowner can pay down the loan principal and reduce negative equity and acquire equity faster than with the existing loan

• This is accomplished by reducing the interest rate to 0% for five years, letting the borrower’s entire monthly loan payment go directly to the principal

• During the five-year period, the borrower’s minimum monthly housing payment is calculated similar to a HAMP modification payment, at 31% of gross income

• At the end of the initial five-year period, the remaining principal balance is amortized over 25 years at the Freddie Mac survey rate

• The bankruptcy judge, with the assistance of the Chapter 13 Trustee, reviews the borrower’s budget to confirm the eligibility of the borrower and feasibility of the payments; and they oversee the implementation of the plan

• There is no cramdown – the benefit to the borrower is achieved by actually paying down the loan

• In exchange for this benefit, the borrower agrees to a general settlement of all claims against the lender and servicer and avoiding future title and loan litigation

• The federal government and US taxpayers’ substantial liability on Fannie Mae and Freddie Mac (all GSE) owned and insured loans would be reduced by this plan

• Private mortgage investors will benefit similarly

• Everyone wins with this plan – even the borrower’s community and local government benefit from improved neighborhood stability

Our office is proud to be a part of the NACBA and we're happy to see them lobby for something that could potentially help so many Americans.  If you cannot afford a reduced mortgage payment or otherwise demonstrate an income to mortgage payment ratio of 31% then the Principal Paydown Plan may not help you.  However, if you are facing foreclosure in the coming months and have demonstrable income then the Principal Paydown Plan could help you save your home if adopted.  Congress has kicked around legislation in the past that would give bankruptcy judges and trustees the right to reduce your mortgage principal or include mortgage debt within the Chapter 13 plan itself but it has not gone anywhere and has been vehemently opposed by mortgage lenders.  If adopted, this proposal could create an useful tool that seems to balance the lender's rights with the consumers.