Amicus Curiae Brief — Nobelman v. American Savings Bank

*ItEp

t - ca

No. 92-641 ! FEB 22 (995 |

oemt E CLERK

In The

Supreme Court of the United States

October Term, 1992

Suareme | wt, U.S,

( }

+

LEONARD NOBELMAN AND HARRIET NOBELMAN,

Petitioners,

V.

AMERICAN SAVINGS BANK,

Respondent.

S

On Writ Of Certiorari

To The United States Court Of Appeals

For The Fifth Circuit

S

BRIEF OF MORTGAGE BANKERS

ASSOCIATION OF AMERICA AS AMICUS

CURIAE IN SUPPORT OF RESPONDENT

+

Rocer M. WHELAN WituiamM E. CumMBERLAND

VINCENT J. COLATRIANO General Counsel -

SHaw, PITTMAN, Potts & MortTcace BANKERS

TROWBRIDGE ASSOCIATION OF AMERICA

2300 N Street, N.W. 1125 Fifteenth Street, N.W.

Washington, D.C. 20037 Washington, D.C. 20005

(202) 663-8000 (202) 861-6516

Of Counsel Counsel of Record for Amicus

Curiae Mortgage Bankers

Association of America

a i rg PRINTING CO., bor 225 6964

L COLLECT (402) 342-283

i

TABLE OF CONTENTS

Ce Ge SE 6 no cc ncccsedecdsacssseuns

STATEMENT OF INTEREST .............cesseeees

STATEMENT OF ISSUES ADDRESSED BY AMICUS

SR SAN Ce eda cede seconss cccoecedbceccessceues

SEAT Memes OF Tite CASE. ... 2.0 ccccccccccccccs

SUMMARY OF ARGUMENT..................0.45.

PPT OTT TTT CTTCTETT TT CTT CTT TTT T TT

I. IN CONSTRUING BANKRUPTCY CODE SEC-

TION 1322(b)(2), THIS COURT SHOULD CON-

SIDER THE MEANING AND INTENT OF

CONGRESSIONAL POLICY....................

Il. THE SECTION 1322(b)(2) PROHIBITION

AGAINST THE MODIFICATION OF THE

RIGHTS OF A CREDITOR HOLDING A CLAIM

SECURED ONLY BY A MORTGAGE ON THE

CHAPTER 13 DEBTOR’S PRINCIPAL RESI-

DENCE PROMOTES CONGRESS’ POLICY OF

FOSTERING AFFORDABLE HOME FINANC-

ED oe cccvadeccvendvanedsdesaséuseeseoretesecs

A. The Section 1322(b)(2) Prohibition Against

Modifying Home Mortgages is Consistent

with Congress’ Support for Home Mort-

gages via Mortgage Guarantees ...........

B. Section 1322(b)(2)’s Prohibition Against

Modifying Home Mortgages is Consistent

with Congress’ Support for Home Mort-

gages via the Secondary Mortgage

Ps co ccnccccsévcestessceeuceesscbepsue

CSE on. ceccvcevecedeonchuasendsnnsaenanen

10

10

ii

TABLE OF AUTHORITIES

Page

Cases

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 733

CC SUGUEnekCnesee sees rvecancecccecccccccce 5

Dewsnup v. Timm, 112 S. Ct. 773 (1992).......... 6, 7, 8

Grubbs v. Houston First American Sav. Ass'n, 730

ccc d vcs conecenedeccecccces: 6

In re Bellamy, 962 F.2d 176 (2d Cir. 1992)............. 6

In re Hougland, 886 F.2d 1182 (9th Cir. 1989) ......... 6

In re Nobelman, 968 F.2d 483 (5th Cir. 1982)........ 4,5

In re Taddeo, 685 F.2d 24 (2d Cir. 1982)............... 9

Landmark Fin. Serv. v. Hall, 918 F.2d 1150 (4th Cir.

CC Eeh es edbbnhbnscoecedeneccececccces: 9

United States v. Ron Pair Enterprises, Inc., 489 U.S.

i Ce CRs + scr scvcccscocccccecccce 5

STATUTES

Feces cecedececeedeececce. 3, 6

reece ks i Neeeesieccecncceseceses 6

5 ov ccc ccccocccccccescceces passim

ic css cacdesscccccencececccesces 8, 9

Es cccccnsccccescccccceccccecess 13

ee iaid es cccccccscescecccccccess 14

7 Home Finance Act of 1970, Pub. L. No.

Da-ee, OO Demet. GSO (ISTO) .... cn cccccccccccccceess 14

Housing and Urban Development Act of 1968,

Pub. L. No. 90-448, 82 Stat. 476 (1968)............ 13

ne

TABLE OF AUTHORITIES - Continued

Page

Sls Ob En occcccceccccecececececcoeseces 15

National Housing Act, Pub. L. No. 73-479, 48 Stat.

Se Gn cee cccccccccsocccccescccccccesceeccces 10

Secondary Mortgage Markets Enhancement Act of

1984, Pub. L. No. 98-440, 98 Stat. 1689 (1984) ..... 14

Tax Reform Act of 1986, Pub. L. No. 99-514, 100

Be ME Ge ccccccceccecceceecesncsteuceseess 15

OTHER AUTHORITIES

H.R. 8200, 95th Cong., Ist Sess. § 1322(b)(2) ......... 5

5 Lawrence P. King, Collier on Bankruptcy

{ 1322.09{1] (15th ed. 1992).............. 0.0 cece ee 9

S. 2266, 95th Cong., Ist Sess. § 1322(b)(2)............

Testimony of Hon. Frank Keating, U.S. Depart-

ment of Housing and Urban Development, June

By SEU vecaccccocenesscccseuctosescesescescccccecs

VA Office of General Counsel Precedent 1-91, 56

Fed. Reg. 25,156 (June 3, 1991) ...................

No. 92-641

°

In The

Supreme Court of the United States

October Term, 1992

.

LEONARD NOBELMAN AND HARRIET NOBELMAN,

Petitioners,

AMERICAN SAVINGS BANK,

Respondent.

°

On Writ Of Certiorari

To The United States Court Of Appeals

For The Fifth Circuit

°

BRIEF OF MORTGAGE BANKERS

ASSOCIATION OF AMERICA AS AMICUS

CURIAE IN SUPPORT OF RESPONDENT

°

STATEMENT OF INTEREST

Mortgage Bankers Association of America (“MBAA”)

files this brief amicus curiae in support of respondent

American Savings Bank with the consent of the parties.

Copies of the letters of the parties indicating consent to

the filing of this brief are being filed with this brief.

MBAA is a national trade association representing

mortgage banking companies, financial institutions, and

other entities participating in the home mortgage market.

MBAA represents the interests of its 2400 participating

members through its research functions and through

involvement in legislative and judicial proceedings.

MBAA filed a brief amicus curiae in support of respondent

with the United States Court of Appeals for the Fifth

Circuit.

The matter at issue in the case at bar will have a

significant impact upon MBAA because the modification

of home mortgages as advanced by petitioners would

have serious adverse effects on the home mortgages,

mortgage markets, and mortgage credit markets in which

amicus’ member institutions are involved. Under peti-

tioners’ interpretation of Bankruptcy Code section

1322(b)(2), amicus’ member institutions will be unable to

realize the full value of their loans, and may be com-

pelled to curtail investing in home mortgages or mort-

gage-backed securities because of anticipated losses.

e

STATEMENT OF ISSUES

ADDRESSED BY AMICUS CURIAE

Does Bankruptcy Code section 1322(b)(2), 11 U.S.C.

§ 1322(b)(2) (1988), prohibit a Chapter 13 debtor from

modifying the rights of a creditor holding a claim secured

only by a mortgage on the debtor’s principal residence?

«

STATEMENT OF THE CASE

Amicus adopts respondent’s Statement of the Case.

Petitioners are Chapter 13 debtors in this bankruptcy

case. Respondent holds the mortgage secured by peti-

tioners’ primary residence. Because the value of the resi-

dence has decreased, petitioners have attempted to

modify respondent’s rights by bifurcating the amount

owing on their home mortgage into secured and

unsecured portions, so as to repay the secured portion

outside of the proposed plan, and to discharge the bal-

ance with unsecured debts under the proposed plan. The

Court of Appeals for the Fifth Circuit affirmed the denial

of petitioners’ proposed reorganization plan.

S

SUMMARY OF ARGUMENT

Amicus will not repeat the detailed discussion of the

language, structure, and history underlying Bankruptcy

Code section 1322(b)(2) so ably set forth in Respondent's

Brief and the Brief for Amici Curiae Federal Home Loan

Mortgage Corporation and Residential Funding Corpora-

tion (“FHLMC Brief”). As demonstrated in those briefs,

Bankruptcy Code section 1322(b)(2) expressly prohibits a

Chapter 13 debtor from modifying the rights of a creditor

holding a claim secured only by a mortgage on the

debtor’s principal residence. Furthermore, as the court

below properly decided, section 506(a) of the Code does

not alter the operation of section 1322(b)(2) to permit a

Chapter 13 debtor to “cram down” a residential mortgage

creditor’s secured claim to the value of the property,

since such a cram down would allow the debtor to mod-

ify the creditor’s rights, the very result forbidden by

section 1322(b)(2). Allowing bifurcation and cram down

would quite simply, as recognized by the court below,

“vitiate the protection of section 1322(b)(2).” In re Nobel-

man, 968 F.2d 483, 489 (5th Cir. 1992). Moreover, if there is

any doubt about the plain meaning of section 1322(b)(2),

the Court should interpret the provision to recognize the

congressional purpose of fostering affordable home

financing and insulating home mortgages from Chapter

13 modification. To permit Chapter 13 modification of

claims secured by home mortgages would be contrary to

the congressionally-fostered system for providing secure,

affordable, and easily attainable home loans for Ameri-

cans.

S

ARGUMENT

I. IN CONSTRUING BANKRUPTCY CODE SECTION

1322(b)(2), THIS COURT SHOULD CONSIDER THE

MEANING AND INTENT OF CONGRESSIONAL

POLICY.

For all the reasons stated in Respondent's Brief and

the FHLMC Brief, amicus believes that the plain meaning

of Bankruptcy Code section 1322(b)(2) forbids Chapter 13

debtors from modifying the rights of creditors secured by

a mortgage on the debtor’s principal residence. More-

over, even assuming the statute’s plain language did not

definitely resolve the issue, the decision of the court

below is the only result that can be squared with the

intent and policy of Congress. It is well settled that the

Court may and should take account of Congress’ pur-

poses and interest when interpreting ambiguous statutes.

See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723,

737 (1975) (when contours of statute may not be divined

from statute’s text, it is proper to consider legislative

policy considerations); United States v. Ron Pair Enter-

prises, Inc., 489 U.S. 235, 109 S. Ct. 1026, 1031 (1989)

(permissible to consider drafter’s intentions and “impor-

tant state and federal interest[s]” when meaning is incon-

clusive).

In Bankruptcy Code section 1322(b)(2), Congress

obviously meant to offer home mortgage lenders protec-

tion from Chapter 13 debtors’ modification of home mort-

gages. Congress’ overwhelming policy to foster

affordable and easily available home mortgages compels

the interpretation of section 1322(b)(2) that protects the

entire amount of home mortgage loans.

That section 1322(b)(2) does not permit cram downs

is apparent not only from its text, but also from its

legislative history. As discussed in more detail in Respon-

dent’s Brief and the FHLMC Brief, under pre-Bankruptcy

Code practice, and specifically under Chapter XIII of the

Bankruptcy Act of 1898, an individual’s plan could not

modify the rights of any creditor holding a claim secured

by real property. Section 1322(b)(2) represents a compro-

mise between the House of Representatives, which origi-

nally proposed to allow the modification of any secured

claims, H.R. 8200, 95th Cong., Ist Sess. § 1322(b)(2)

(1977), and the Senate, which proposed to preserve the

Chapter XIII protection to all creditors holding claims

secured by real property. S. 2266, 95th Cong., Ist Sess.

§ 1322(b)(2) (1977). See In re Nobleman, 968 F.2d at 488-89;

Grubbs v. Houston First American Sav. Ass'n, 730 F.2d 236,

246 (5th Cir. 1984) (en banc). In striking this compromise,

Congress was motivated by its desire to preserve the

availability of residential mortgage lending for individ-

uals who could not otherwise afford to buy a home,! and

by its concern, as expressed by witnesses during legisla-

tive hearings, that allowing modification of the rights of

residential mortgage lenders could dry up the residential

mortgage market. Id. Cram downs are precisely the kind

of modifications that would have such an adverse effect,

and they are thus precisely the kind of modifications that

section 1322(b)(2) was designed to prevent.

This analysis tracks that of the Court’s decision last

Term in Dewsnup v. Timm, 112 S. Ct. 773 (1992). In decid-

ing that a debtor could not use section 506(d) of the

Bankruptcy Code, in conjunction with section 506(a), to

“strip down” a creditor’s lien on real property to the

value of the collateral, the Court relied in large part on

1 Even those courts that have allowed cram downs have

acknowledged the congressional purpose of protecting residen-

tial real estate lenders. See, e.g., In re Bellamy, 962 F.2d 176,

181-82 (2d Cir. 1992); In re Hougland, 886 F.2d 1182, 1185 (9th Cir.

1989).

2 In Dewsnup, the Court rejected a debtor’s argument that

section 506(d) of the Code allows the debtor to void any lien to

the extent it exceeds the value of the property securing the debt.

The Court refused to resolve the ambiguous text of section

506(d) by giving the words “allowed secured claim” in that

section the same meaning those words have in section 506(a), in

part because such a construction would depart from pre-Code

law and in part because such a construction would give the

debtor an unbargained-for windfall in the event that the

property subsequently appreciated in value. [d. at 778. The same

the fact that pre-Code bankruptcy law did not allow such

a practice and there was “nothing in the Code’s legisla-

tive history that reflects any intent to alter that law.” Id. at

777. As the Court put it,

[T]o attribute to Congress the intention to grant

a debtor the broad new remedy against the

allowed claims to the extent that they become

“unsecured” for purposes of § 506(a) without

the new remedy’s being mentioned somewhere

in the Code itself or in the annals of Congress is

not plausible, in our view, and is contrary to

basic bankruptcy principles.

Id. at 779.

The Court’s reasoning in Dewsnup is fully applicable

here. As discussed, it is undisputed that under pre-Code

bankruptcy law, a Chapter XIII debtor could not alter or

in any way (including through a cram down) modify a

claim that was secured by the debtor’s real property.

Although in enacting the Code Congress allowed mod-

ification in situations other than claims secured by the

debtor’s principal residence, there is no indication in the

Code’s legislative history that, with respect to claims

secured by the debtor’s principal residence, Congress

intended to do anything other than to preserve the pre-

Code protection against modification in all of its forms.

analysis applies fully here, as the cram down relief sought by

petitioners clearly departs from pre-Code law and would give

petitioners the same windfall discussed in Dewsnup.

Furthermore, respondent's case is even stronger here than was

the creditor’s in Dewsnup because section 1322(b)(2) contains an

explicit prohibition against modification.

Indeed, the legislative history demonstrates that Con-

gress specifically intended to protect the rights of resi-

dential mortgage lenders. Thus, when “Congress amends

the bankruptcy laws, it does not write ‘on a clean slate,’ ”

Dewsnup, 112 S. Ct. at 779 (citation omitted), and because

there is no indication in the Code’s legislative history that

Congress intended to permit cram downs, this Court

should not attribute to Congress the intent to grant peti-

tioners the “broad new remedy” they assert. Id.

Finally, if the Court focuses, as it must, on the struc-

ture of section 1322 as a whole, it should conclude that

the Fifth Circuit’s decision was correct. The interrelation-

ship among section 1322(b)’s provisions, and particularly,

the interrelationship between sections 1322(b)(2) and

1322(b)(5), demonstrate an inherent weakness in peti-

tioners’ proffered construction. Section 1322(b)(5) allows

the debtor, when the repayment period under the original

lender-borrower agreement is longer than the three to

five year term of the debtor’s plan, to cure any prior

default and pay arrearages on any secured or unsecured

claim over a reasonable time.* By far the most common

type of individual debt which has a term longer than

3 Section 1322(b)(5) provides that a plan may

notwithstanding paragraph (2) of this subsection

[section 1322(b)(2)], provide for the curing of any

default within a reasonable time and maintenance of

payments while the case is pending on any

unsecured claim or secured claim on which the last

payment is due after the date on which the final

payment under the plan is due.

three to five years is the home mortgage.‘ Thus, section

1322(b)(5) provides a significant remedy to debtors that is

not limited by section 1322(b)(2)’s prohibition on mod-

ification. However, the relief provided by section

1322(b)(5) — the ability to pay arrearages over time — does

not extend to allow the debtor to miss or restructure

current or future payments under the original loan agree-

ment.> By granting this limited relief to debtors, Congress

sought to protect debtors against the loss of their homes

because of non-payment of arrearages while at the same

time protecting the residential mortgage industry (with

the ultimate goal of facilitating home ownership) by pro-

tecting against any further modification of the creditor’s

rights. To allow cram downs upsets this delicate but

limited remedy specifically enacted by Congress and

tramples on congressional intent.

4 See 5 Lawrence P. King, Collier on Bankruptcy { 1322.09(1)]

(15th ed. 1992) (“Although section 1322(b)(5) is not limited to

secured or residential loans, its most common use by far is to

cure defaults on residential mortgages.”).

5 Moreover, the ability of the debtor to cure a default and

pay arrearages over a reasonable period of time under section

1322(b)(5) is not, in any way, deemed a modification of the

secured claim within the meaning of section 1322(b)(2). See, e.g.,

In re Taddeo, 685 F.2d 24 (2d Cir. 1982); Landmark Fin. Serv. v. Hall,

918 F.2d 1150 (4th Cir. 1990).

10

Il. THE SECTION 1322(b)(2) PROHIBITION

AGAINST THE MODIFICATION OF THE

RIGHTS OF A CREDITOR HOLDING A CLAIM

SECURED ONLY BY A MORTGAGE ON THE

CHAPTER 13 DEBTOR’S PRINCIPAL RESIDENCE

PROMOTES CONGRESS’ POLICY OF FOSTER-

ING AFFORDABLE HOME FINANCING.

A steady procession of congressional enactments

demonstrates Congress’ policy to encourage capital

investment in home ownership in order to provide

affordable home financing for Americans. Congress has

sought to implement this goal in two main ways: (1) by

providing for mortgages guaranteed by the government,

and (2) by fostering a vital, effective, and secure second-

ary mortgage market. Section 1322(b)(2)’s prohibition

against any modification of home mortgage liens sup-

ports both mechanisms. Indeed, allowing modifications

of home mortgages would seriously undermine the sys-

tems Congress has so effectively created.

A. The Section 1322(b)(2) Prohibition Against

Modifying Home Mortgages is Consistent with

Congress’ Support for Home Mortgages via

Mortgage Guarantees.

As early as 1934, when Congress passed the National

Housing Act, Pub. L. No. 73-479, 48 Stat. 1246 (1934),

establishing the Federal Housing Administration

(“FHA”), Congress sought to make more home loans

available by insuring home mortgages made by private

lenders. During World War II, Congress again sought to

make home financing available to more Americans by

11

establishing the Veteran’s Administration (now Depart-

ment of Veterans Affairs (“VA”)) and the VA Home Loan

Guaranty Program.

In essence, the mortgage insurance programs provide

the mortgage borrower and lender with a substitute for

the borrower’s equity. If the borrower is not able to pay,

the mortgage insurance program covers the lender’s loss.

The existence of these mortgage guaranty programs,

therefore, has enabled private mortgage lenders to pro-

vide borrowers with loans requiring low down payments.

Until Congress created the FHA Home Loan Mortgage

Insurance Program, now operated by the Department of

Housing and Urban Development, and the VA Home

Loan Guaranty Program, mortgages were only available

in amounts up to 75 or 80 percent of the value of the

home, with the remaining balance of 20 to 25 percent

being required as a down payment. With the use of the

FHA and VA programs, and conventional (that is, non-

governmental) mortgage insurance programs patterned

after the FHA and VA programs, mortgages up to 95

percent of the home’s value became common. Prospective

home buyers who are unable to provide a 20 or 25 per-

cent down payment may now become homeowners.

The success of these government programs is demon-

strated by their growth. In 1992, FHA insured $48.3 Bil-

lion in mortgages, and by the end of 1992 there was

$321.9 Billion in FHA-insured mortgages outstanding.® In

1992, the VA guaranteed $25.2 Billion in mortgages from

6 All data set forth in this brief is from information com-

piled by the Economics Department of the MBAA.

12

private lenders, and by the end of 1992 there was $159.6

Billion in outstanding VA guaranteed loans.

Each of the FHA and VA programs, however, share a

common characteristic — they require the lender to liqui-

date the mortgage before the government will pay a claim

for loss. VA Office of General Counsel Precedent 1-91, 56

Fed. Reg. 25,156 (June 3, 1991). This characteristic was

present when section 1322(b)(2) was enacted and is pre-

sent today.” If the Court allows modification to reduce the

amount of the protection available to home mortgages,

then the government will guarantee payment only to the

extent of the reduced balance resulting from the modifica-

tion. VA General Counsel Precedent 1-91.

Because modification will affect the government's

guaranty at the expense of lenders, lenders must and will

respond rationally to protect themselves from being

undersecured. The most effective form of such protection

will be to increase the down payments required to obtain

home loans, especially in geographic areas of economic

uncertainty. The result will be to frustrate the policy of

and incentives included in Congress’ home loan guaranty

programs — to make home loans available to more Ameri-

cans. If, however, section 1322(b)(2) is interpreted as the

Fifth Circuit interpreted it, and as suggested by respon-

dent and amicus, then Congress’ policies and programs to

foster housing will remain effective.

7 Testimony of Hon. Frank Keating, U.S. Department of

Housing and Urban Development, June 6, 1991, at 4. A copy of

Mr. Keating’s testimony was filed with amicus’ Fifth Circuit

brief.

13

B. Section 1322(b)(2)’s Prohibition Against Mod-

ifying Home Mortgages is Consistent with

Congress’ Support for Home Mortgages via the

Secondary Mortgage Market.

The secondary market for home mortgages also will

be impaired if Chapter 13 modification of home mort-

gages is allowed in the manner advanced by petitioners.

In the secondary market, mortgages are sold by mortgage

bankers and other mortgage originators® into the nation-

wide (indeed, worldwide) capital markets to permanent

investors. A significant aspect of the secondary mortgage

market is the mortgage-backed security, which is based

on pools of mortgages.

Congress, through several pieces of legislation, has

fostered the growth of the secondary market. For exam-

ple, in the Housing and Urban Development Act of 1968,

Pub. L. No. 90-448, 82 Stat. 476 (1968), Congress autho-

rized the new Government National Mortgage Associa-

tion (“GNMA”) to “guarantee the timely payment of

principal and interest on such trust certificates or other

securities as shall (i) be issued by ... any. . . issuer

approved . . . by the Association, and (ii) based on and

backed by a trust or pool composed of mortgages... . ”

12 U.S.C. § 1721(g)(1). GNMA’s guaranteed mortgage-

backed securities program began operating in 1970, and

through mid-1992 GNMA had guaranteed over $423 Bil-

lion in securities based on and backed by pools of mort-

gages. The Federal National Mortgage Association

8 Mortgage originators bring the mortgage into existence

after negotiating, arranging, and facilitating the making of a

mortgage loan.

14

(“FNMA” or “Fannie Mae”) began issuing mortgage-

backed securities in 1981. Through mid-1992, FNMA had

issued over $413 Billion in securities based on and backed

by mortgage pools. These mortgage-backed securities

complemented the $98 Billion in mortgages held by

FNMA in portfolio in 1992.

In 1970, Congress passed the Emergency Home

Finance Act of 1970, Pub. L. No. 91-351, 84 Stat. 450

(1970), Title III of which created FHLMC (also known as

“Freddie Mac”). Congress gave FHLMC authority to issue

participation certificates based on and backed by pools of

mortgages, and FHLMC began its Participation Certifi-

cate program in 1971. Through mid-1992, FHLMC had

issued over $382 Billion in participation certificates based

on and backed by mortgage pools. FHLMC held $28.6

Billion in mortgages in portfolio in 1992.

To facilitate the trading of mortgage-backed securi-

ties in the capital markets, Congress passed the Second-

ary Mortgage Markets Enhancement Act of 1984, Pub. L.

No. 98-440, 98 Stat. 1689 (1984), which added an exemp-

tion to the restrictions on credit extension by securities

dealers for a “mortgage related security.” The Act defines

a mortgage related security as including a security that

“represents ownership of one or more promissory notes

or certificates of interest or participation in such notes

... which notes . . . are directly secured by a first lien on a

single parcel of real estate . . . or on a residential manu-

factured home.” 15 U.S.C. § 78c(a)(41).

In order to provide more flexibility in the issuance of

mortgage-backed securities, Congress created the Real

Estate Mortgage Conduit (“REMIC”) in Section 671 of the

15

Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085

(1986). With regard to REMICs, the Act defines a “quali-

fied mortgage” as “any obligation (including any partici-

pation or certificate of beneficial ownership therein)

which is principally secured by an interest in real prop-

erty....” LR.C. § 860G(a)(3)(A).

As in 1978 (when section 1322(b)(2) was enacted),

today the home mortgage credit market relies heavily on

the secondary market for mortgages. The size and impor-

tance of this efficient market is immense. In 1978, when

the Bankruptcy Code was enacted, $742.8 Billion in home

mortgages were outstanding. Of these mortgages, $65.4

Billion (8.8 percent) were in mortgage pools. In mid-1992,

$2.9 Trillion in home mortgages were outstanding, of

which $1.3 Trillion (44.8 percent) were in mortgage pools.

The secondary mortgage market and mortgage-

backed securities have important benefits to prospective

American homeowners. First, the secondary mortgage

market enables economies of scale that, in turn, allow

lenders to offer mortgages at rates and on terms that are

comparable to those otherwise available only to large

corporations. These attractive rates would not be avail-

able to individuals if the efficiency of the home finance

credit markets were not present. Second, because of mort-

gage-backed securities encouraged by congressional leg-

islation, mortgage bankers, and other mortgage

originators, can access the investment capital market in

dollar volumes far above the volumes that the capital of

the mortgage banker ordinarily would support. The

result of this increased access is that many more mort-

gage originators are available to make loans to individ-

uals seeking to buy a home.

16

The secondary mortgage market and mortgage-

backed securities will continue to offer advantages to the

individual home buyer, however, only if a predictable

flow of principal and interest from mortgages can be

maintained. Only such a predictable flow can ensure

securities issuers that they will meet their obligations to

their investors — to provide both interest and principal on

their investors’ securities in full and in a timely manner,

regardless of the performance of individual mortgages.

Interpreting section 1322(b)(2) to prohibit any modifica-

tion of home mortgages is a crucial aspect in ensuring the

predictable flow of principal and interest from home

mortgages. This is the only interpretation consistent with

Congress’ years of legislation tailored to foster mortgage-

backed securities. If modification were allowed, then a

significant element of uncertainty would be introduced

into the mortgage credit market and the mortgage-backed

security market would be considerably weakened.

S

CONCLUSION

Congress has enacted a pervasive and important leg-

islative program to foster home mortgages and home

ownership in America. Congress recognized the potential

harmful impact on this program if modifications of home

loans were allowed, and it provided special protection for

home mortgages in the Bankruptcy Code. The only inter-

pretation of Bankruptcy Code section 1322(b)(2) consis-

tent with this congressional policy is the broad and full

protection accorded by the court below - that a Chapter

13 debtor may not modify home mortgages by bifurcating

those mortgages into secured and unsecured parts. For

17

the foregoing reasons, therefore, the Court should affirm

the decision of the Court of Appeals for the Fifth Circuit.

Dated: February 22, 1993 Respectfully submitted,

Wituram E. CumMBeRLAND

General Counsel

Mortcace BANKERS

ASSOCIATION OF AMERICA

1125 Fifteenth Street, N.W.

Washington, D.C. 20005

(202) 861-6516

Counsel of Record for

Amicus Curiae Mortgage

Bankers Association of

America

Rocer M. WHELAN

VINCENT J. COLATRIANO

SHaw, Pittman, Potts &

TROWBRIDGE

2300 N Street, N.W.

Washington, D.C. 20037

(202) 663-8000

Of Counsel