Loan servicers submit Fannie Mae form 975 when a homeowner in Chapter 13 (payment plan) bankruptcy petitions the bankruptcy court to reduce his mortgage balance because the property value is smaller than the outstanding balance. In a time of 125 percent LTV loans, mortgage fraud, second mortgages and (some say) a possible "home price bubble," you might expect this form to get a good workout in the near future.
As it happens, Fannie may do well to retire the form. The bankruptcy reform bill passed overwhelmingly by both houses of Congress and signed this month by the President prohibits such a reduction in mortgage (or any other secured loan) balances, commonly called "cram-downs."
Bankruptcy courts routinely commissioned appraisals to inform its decision to lower a balance, and a servicer submitting form 975 was instructed to submit the court's appraisal, its own appraisal, or a BPO. Now, it won't matter what the value of a property is, even if the bankruptcy is prompted in part by the homeowner's inability to sell out from under the loan because the balance far exceeds market value.
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