Federal lawmakers will be considering a full plate of housing legislation when they return from their holiday break on Jan. 25. But this is apt to be a short session because of election year politicking, so only those measures that receive early consideration are likely to reach the President's desk.

"An election-year Congress seldom produces major pieces of legislation, or a large volume of legislation," says Albert Elder, Washington counsel for America's Community Bankers.

"Congressmen spend more time in their home districts campaigning, and they don't want to get involved in anything controversial that would provide fuel for their opponents' campaigns," the lobbyist explains. "So if it doesn't happen quickly in an election year, it doesn't usually happen."

The first major issue of particular importance to home owners to come up for a major vote will be bankruptcy reform. The House passed its version last year, and now the Senate will be asked to clear a companion bill the day after the 106th Congress reconvenes for its second session.

There is tremendous support to revamp the bankruptcy code to prevent people from abusing the system. One study found that one in four people who declared bankruptcy had the ability to pay back a significant portion of what they owed creditors. And some home owners have used the law to keep lenders from foreclosing for three or four years after they stopped receiving payments.

But there just might be too much support for the bill to pass cleanly. Since everyone knows the bill will pass, there is a tendency to try to load it up with non-germane items such as gun control or anti-abortion legislation, turning a popular single-topic measure into an omnibus "Christmas tree" bill that has no chance of advancing.

The Senate leadership will attempt to cut off debate and bring the bill up for a vote. The betting is that they won't succeed, and that reform advocates will have to start all over again from ground zero next year. But if the measure does win approval, it will move on to a House-Senate conference committee to resolve the differences between the two versions.

Neither bill would force an owner who declares bankruptcy to give up his home. But they wouldn't allow you to get out of your house payments, either. A mortgage is a secured obligation that can't be discharged. Instead, the measures would set a so-called "needs-based formula" to distinguish between those who can pay something back on their unsecured debts and those who can't.

Those who can't pay anything would proceed directly to Chapter 7 bankruptcy in which all unsecured debts are totally forgiven. But those who can would be placed into Chapter 13 bankruptcy in which the court would decide how much the debtor would have to pay and for how long. For example, you might be required to pay 50 cents on the dollar for, say, five years. Under either scenario, though, home owners should find it easier to continue making their mortgage payments.

The Senate and House versions also protect creditors against "cram downs," and prevent debtors from stopping foreclosure proceedings by filing for bankruptcy and then voluntarily withdrawing their cases over and over again.

A cram down is a court-ordered reduction in the debtor's mortgage balance based on the current value of the property. In economically distressed markets where houses have lost value, some financially strapped borrowers have succeeded in getting judges to write down the amount they owe to what their houses are currently worth.

For example, say you lose your job five years after you took out a $150,000 mortgage to buyer a $180,000 house. And because the bottom has fallen out of the local economy, the house now appraises for just $120,000. Under a cram down situation, the court would lower your loan balance to the lesser amount, and the lender would have to involuntarily eat the difference.

The bills also would negate the abusive practices of purchasing a house on the eve of bankruptcy to benefit from cram down provisions and of vacating a home shortly before filing to avoid anti-modification protections.

Other measures worth watching this legislative year would relieve home owners from paying income taxes on the cancellation of mortgage debt and establish a federal national disaster insurance program to cover catastrophic loses to dwellings from hurricanes, floods, earthquakes and tornadoes. Unfortunately, the prospects aren't good for either bill.

The bill to nix the tax on "phantom income" would help thousands of owners who are forced to sell at a loss. Under current law, when an "under water" borrower sells a property for less than he owes and the lender cancels that portion of the debt, the Internal Revenue Service says he has to recognize that amount as ordinary income and pay tax on it.

The bill has passed Congress twice now. But both times, it was as part of more sweeping legislation. And both times the larger measures were vetoed by President Clinton. Now, Linda Goold of the National Association of Realtors, the bill's main backer, doesn't think it can pass on by itself.

"Single issue tax bills never go through on their own; they're always part of a package," explains Goold. "If there's a package bill this year, there's a good chance it will be included. After all, it's a 'little guy' provision. But I'm not particularly optimistic that there will be any tax legislation. I'd say there's less than a 50-50 chance."

The disaster insurance measure would make it easier for owners in disaster-prone areas to obtain insurance protection. In some places, coverage is very difficult to obtain. And if coverage isn't available or is unaffordable, you can't get a mortgage.

Opponents believe it is unfair to require taxpayers to subsidize residents who knowingly choose to live in dangerous areas. Nevertheless, a bill to create a federal reinsurance program that would allow states to sell a percentage of the risk to their own disaster insurance programs to Uncle Sam has passed a key House subcommittee by a substantial margin.

But it's not terribly promising that it will get much further, at least not this year, unless there's a "huge" natural disaster somewhere, says lobbyist Elder. "Congress is reactive, not proactive," the lobbyist explains. "A big natural disaster might give it the push it needs. Otherwise, it probably won't pass."

Published: January 17, 2000

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