In the fall of 2007, when Illinois Senator Dick Durbin introduced the first version of the bill now known as the "Helping Families Save Their Homes in Bankruptcy Act of 2009", an estimated 2 million American homeowners were facing foreclosure.  Due in large part to opposition from banks, that bill failed to gain traction--no matter how many times Durbin and his colleagues introduced it in various forms. 

Today, however, things have changed.

While most of the mortgage lending industry is still vehemently opposed to the legislation--so much so that the Mortage Bankers Association has a "Stop the Bankruptcy Cram Down Resource Center" on its website--Citigroup broke ranks earlier this month and agreed to support the legislation in exchange for a few compromises.

That turnaround, combined with an increased Democratic majority in the legislature and the support of our new President, make passage of the bill appear closer than it's ever been.  And just in time.  In less than 18 months, that projection of 2 million homes going into foreclosure has ballooned:  late in 2008 CreditSuisse upped its projections to more than 8 million homes going into foreclosure over the next four years.  That's about 16% of all U.S. mortgages.

The hotly contested change is actually a relatively minor one--but one that could have huge significance for homeowners facing foreclosure.  That's because an odd inconsistency in the current bankrupcy code makes a debtor's home mortgage just about the only secured debt that the bankruptcy court is powerless to modify.   The Mortgage Bankers Association and lenders across the country talk a lot about the "increased risk" if this provision passes, and how that "increased risk" will be passed along to you in the form of higher interest rates.  But in fact, keeping homeowners in their homes and making their mortgage payments is to everyone's advantage--not just the homeowners' and the banks', but everyone's.  The ever-mounting rate of foreclosures is not only driving down home values across the country, but makes it difficult or impossible for mortgage holders to resell foreclosed properties. They're sitting empty across the country; some banks are reportedly paying people to live in them to prevent vandalism.  It's hard to imagine how being compelled to restructure a loan on reasonable terms would put those institutions at greater risk.

The House version of the bill is slated for mark-up today.  It's sponsors estimate that it could help more than 2.5 million homeowners directly, and would benefit many others by making mortgage holders more willing to negotiate modifications.  But it remains to be seen exactly what impact the Citigroup modifications will have on the power of the bill.  The three provisions seem reasonable on the surface:  the bill will apply only to mortgages originated before its enactment, bankruptcy courts will be able to void loans only where rescission would be available under the Truth in Lending Act , and borrowers would be required to contact lenders to attempt to negotiate a modification before filing for bankruptcy protection.

It's the last point that may be of concern:  Will borrowers be compelled to accept modification offers that aren't truly adequate to their needs? If they do accept modification offers, will that impact their access to relief in the bankruptcy courts?  The language of this provision will be the key to this new law's teeth.