The Foreclosure Prevention Act of 2008 – or Bill HR 3221 – is Congress’ latest attempt to stymie the downward spiral of the current economy. The bill is lurching along, having passed the Senate as of July 10 but still awaiting possible changes or even a veto by the president. The foreclosure mess is a major headline every day, so it is not a surprise that politicians are scrambling to try to find a fix.
What does the act do? A huge variety of items are included in the bill, some related directly to the foreclosure disaster and others seemingly a bit removed. Provisions include items such as relief for businesses most directly affected by the crisis and tax credits to home buyers who buy homes in foreclosure. It also includes provisions to help ward off future similar events by changing the Truth in Lending Act so purchasers are clearer on what they are getting into before they sign on the dotted line.
The most important provisions, however, are the ones that offer direct assistance to homeowners facing imminent foreclosure. Two major sections include funding for pre-foreclosure counseling, in the hopes of helping debtors and their mortgage holders connect and work out the problems amongst themselves, and allowing housing agencies to issue bonds to generate additional income to refinance subprime loans.
One potentially questionable area, however, is Title IV of S. 2636, as it is called before being amended to HR 3221.This provision would alter the Bankruptcy Code, allowing a bankruptcy judge to actually modify the mortgage agreement by reducing interest rates. Whether or not this will pass remains to be seen, as the entire bill is sliced, diced, and put back together. If it stands as is, the question on this section, however, is whether or not this bill violates the Contracts Clause of the Constitution, which reads in part, “No state shall… pass any law impairing the obligation of contracts.”
An eerily similar situation arose during the Great Depression, in the famous 1934 case (which is still good law, incidentally) Home Building and Loan Association v Blaisdell, in which mortgage defaults were staved off by an extended period of default. The mortgage companies were not allowed to foreclose as soon, protecting homeowners. This occurred during the Great Depression, when homeowners were losing their houses at a rapid pace. The Supreme Court reasoned this was not a permanent impairment, only a temporary one, and was therefore allowable.
HR 3221, however, if passed as written, could permanently alter or impair private contracts by allowing a bankruptcy judge to modify mortgage agreements by reducing interest rates. Depending on the final wording, this could be imminently distinguishable from Home Building and Loan. The question for now is, will it pass constitutional muster? Since all laws are made with a presumption of constitutionality, it will have to be challenged in court before we may know for sure…. Of course, since these mortgages are already in bankruptcy, it can be argued that the contract has already been modified with such severity that these alterations in rates are simply a saving grace.
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