House Approves Cramdown Bill. Next Stop Senate

The House of Representatives on Thursday night approved legislation 234 to 191 that would let bankruptcy judges modify or "cram down" mortgages, but the bill's fate in the Senate remains unclear. Though the House leadership had enough of a majority to pass the bill over opposition from Republicans and several conservative Democrats, Senate leaders do not have as much leeway. Some Senate Democrats, including Sen. Evan Bayh of Indiana, continue to push for ways to narrow the bill, encouraged by the banking industry, which believes the legislation will drive up the cost of credit. The bill passed on Thursday included language designed to encourage borrowers to attempt to seek a loan modification from their lender before bankruptcy. For example, if a servicer offered a borrower a loan modification, the homeowner would have to consider it before heading to bankruptcy court. The judge would retain the ultimate say in determining if the borrower acted in good faith and could still reduce the terms of the mortgage. The borrower also would have to wait 30 days between trying to receive assistance from the servicer and going to bankruptcy. The National Association of Consumer Bankruptcy Attorneys said the bill "will not excuse families from paying their mortgage. It simply gives bankruptcy court judges the authority to modify loans and puts a floor on the downward spiral of home values in neighborhoods across the country."