There’s just no getting around it. Even with the welcome increase in February home starts, there are just too many houses for sale right now, and the values of homes has dropped sharply over the last year. Odds are the outstanding mortgage balance on a house is almost as great as – or worse, more than the market value of the house itself!

Enter HASP, the Homeowner Affordability and Stability Plan, designed to help stabilize declining home values. In three ways, HASP will attempt to realign mortgages with today’s actual home values:

1. For homeowners with good credit:
HASP will allow loans to be made up to 105% of the property’s value. (Under regular rules, Fannie Mae and Freddie Mac are not allowed to acquire loans with loan-to-value ratios of more than 80%. To get around these rules, HASP will call the deals “modifications” rather than refinancings.)

2. For homeowners who can’t afford their mortgage payments:
Lenders are called on to make the first move, by reducing the interest rate and/or the principal amount of the debt so that the monthly mortgage payment is not greater than 38% of income. Then, the government will kick in by matching the lender’s reduction measured until the mortgage payment is down to 31% of income. (Modified loan terms would stay in play five years, and then gradually return to the contract rate.

If lenders do not cooperate with requests to modify mortgages, that’s where the new bankruptcy law would kick in. Borrowers would be able (as this blog is being written, debate on this measure is being carried on in the U.S. Senate) to file bankruptcy and asking the judge to “cram down” their loan. Meanwhile, as the involvement of bankruptcy judges is being discussed, HASP sets aside $75 billion towards the task of mortgage modification.

It’s coming up on a year that I’ve been closely following the debates on mortgage modification. Because the “cramdown” plan involves measuring homeowners’ income, the type of bankruptcy case that would be involved would be Chapter 13. As a board certified consumer bankruptcy specialist, I believe this legislation crucial for helping homeowners avoid losing their homes to foreclosure.

In a regular Chapter 13, the way things have worked up to this point, the debtor would need, in order to save the home, to make regular mortgage payments plus payments on the “arrears” or back payments. The new bankruptcy law could make it much more feasible for homeowners to have a real chance at a fresh financial start.