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Office of the Attorney General
Attorney General Conway Urges Congress to Amend Bankruptcy Code to Protect Distressed Homeowners from Foreclosure
Attorney General Jack Conway, along with the attorneys general of 21 other states and the District of Columbia, today sent a letter to U.S. House and Senate leadership urging them to amend the U.S. Bankruptcy Code to permit federal bankruptcy courts to protect families from foreclosure.
“It is imperative that we work with the courts, banks and consumers to provide a real solution to help families meet their financial obligations and remain in their homes,” General Conway said. “Bankruptcies that result in homes being foreclosed upon are certainly not in the best interest of financial institutions or consumers. It benefits both sides to amend terms of mortgages to allow consumers to repay the bank and keep their homes.”
The attorneys general note in their letter that despite the best efforts of state and federal government regulators to engage servicers in voluntary loan modifications to avoid unnecessary foreclosures, further action to spur meaningful modifications must be taken. For instance:
- The most troubled mortgages are securitized and therefore multiple stakeholders may be involved in the decision to modify mortgage loans, causing a continued paralysis.
- The multi-state Foreclosure Prevention Working Group released a report compiled from data from 13 major servicers in September 2008 showing that voluntary loan modification measures have fallen short.
- The recently-enacted federal “Hope for Homeowners” program has generated little interest from mortgage holders. The Department of Housing and Urban Development (HUD) recently reported that only 111 applications had been submitted nationwide.
Under the amendment urged by the attorneys general, losses and benefits would be shared between homeowners and investors. If a federal Bankruptcy Court ordered a loan modification, the homeowner would be required to pay the loan based on the current secured value and the mortgage holder may be required to absorb the unsecured portion of the debt that exceeds the value of the home. A homeowner with regular income will retain his or her home while paying a sustainable mortgage. The mortgage holder receives a steady stream of income while avoiding the losses and expenses incident to a foreclosure sale.
Today’s letter highlights the reasons that the bankruptcy system is well-equipped to handle this crisis. With approximately 300 judges experienced in valuing property, no new agency, regulations or personnel are needed to implement the amendment. The proposal could take effect immediately and should not cost taxpayers anything. The Attorneys General do not anticipate an increase in bankruptcy filings by passing such an amendment; instead they believe such a measure will likely motivate mortgage servicers and secondary market investors to achieve sustainable loan modifications.
Attorneys general from the following states joined Kentucky in today’s request to Congress: Arizona, California, Connecticut, Delaware, District of Columbia, Illinois, Iowa, Kentucky, Louisiana, Massachusetts, Minnesota, Mississippi, Montana, New Mexico, North Carolina, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Vermont, Washington and West Virginia.
Letter to House Leaders (196k PDF)
Letter to Senate Leaders (196k PDF)
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