Cramdowns on Agenda In Bankruptcy Debate
With rising defaults and foreclosures, House and Senate Democrats are expected to push hard for a bill that allows troubled borrowers to get their mortgages restructured by a bankruptcy judge.
The House Judiciary Committee approved a bankruptcy bill by a 17-15 vote in December. And the House is expected to vote on the bill (H.R. 3609) early in the new congressional session.
Sen. Richard Durbin, D-Ill., has called on President Bush to support bankruptcy reform so homeowners can get their mortgages renegotiated by filing for Chapter 13 bankruptcy.
The assistant majority leader noted that the Bush administration's Hope Now initiative for restructuring mortgages is too narrowly focused and "leaves out 90% of Americans that need assistance."
Democrats and consumer groups claim that bankruptcy restructurings will encourage more voluntary loan modifications - particularly for securitized mortgages where servicers are afraid of being sued by investors.
But Bush administration support is unlikely. Only one Republican, Rep. Steve Chabot of Ohio, voted for H.R. 3609 and the mortgage industry and financial services trade groups adamantly oppose to it.
Meanwhile, Sen. Durbin has been trying to work with Sen. Arlen Specter, R-Pa., on a bipartisan approach without much success.
The House Judiciary Committee approved a bankruptcy bill Dec. 12 after key Democrats forged a compromise with Rep. Chabot that significantly narrows the scope of the bankruptcy bill.
As approved, the bill only provides bankruptcy relief for subprime and nontraditional mortgage borrowers who have received a notice of foreclosure. Prime loans are excluded.
In addition, the committee-approved bill only allows bankruptcy restructurings on mortgages originated from 2000 through 2007 and up to the date of enactment. The bill sunsets after seven years.
This bill will "help those who already find themselves in the foreclosure process because of a nontraditional or subprime loan and do not have a way out," Rep. Chabot said.
If enacted, bankruptcy judges could waive prepayment penalties and reduce or "cram down" the mortgage amount to the fair market value. They could also reduce the interest rate to a conventional rate with a risk premium.
The Ohio congressman noted that 2,100 families in a county in his district are expected to lose their homes because of subprime loans issued in 2005 and 2006.
"I don't think anyone would disagree that we are in the midst of a crisis - and one that is deepening," Rep. Chabot said.
Despite the changes, other Republicans on the committee warned against giving bankruptcy judges new powers to restructure mortgages, claiming it will increase the cost of mortgages for future borrowers.
"These changes do not narrow the scope enough to protect future borrowers," Rep. Lamar Smith, R-Texas, said.
The Mortgage Bankers Association and American Bankers Association oppose the bill.
This bill will have a "chilling effect on future lending," ABA executive director Floyd Stoner said, by creating "more doubt" about the value of the collateral underlying a mortgage.
MBA senior vice president Steve O'Connor said it is just "bad public policy."
The Independent Community Bankers of America encouraged the sponsors of the bill to target it at subprime mortgages. "But we still have serious concerns about the bill," ICBA vice president Ron Ence said.
"We question whether the bill in the end will make things better or worse. Right now we think it will make things worse," Mr. Ence said.
The National Association of Federal Credit Unions withdrew its opposition to H.R. 3609 as a result of the changes that narrowed the scope of the bill. "Additionally, we feel that being able to use a means test to determine ability to repay is an important aspect and appreciate its inclusion" NAFCU president and chief executive Fred Becker said. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/