Central District Consumer Bankruptcy Attorney's Association

Mortgage cramdown faces critical test
By VICTORIA MCGRANE
| 4/7/09 4:44
AM EDT
Text Size:
Chris Dodd has given housing advocates two weeks to find a compromise
that would win 60 votes for a long-stalled proposal to allow bankruptcy
judges to restructure mortgages.
Photo: Reuters
It's cram time for cramdown proponents.
Senate Banking Committee Chairman Chris Dodd (D-Conn.) has given housing
advocates two weeks to find a compromise that would win 60 votes for a
long-stalled proposal to allow bankruptcy judges to restructure
mortgages. Critics of this proposal call it a cramdown because it would
force mortgage lenders to reduce principal and interest rates in some
bankruptcy cases.
"So we get back here [after a two-week spring break], we're either there
or we're not there," Dodd said. "We have to move along on these things."
When asked if that meant he was willing to drop the bankruptcy
provision, Dodd hedged. "Well, I'm not saying that," he said. "I'm going
to think optimistically."
But Dodd's comments echo a March 27 statement by Senate Majority Leader
Harry Reid (D-Nev.) that he would strip the bankruptcy provision from a
major housing bill if the votes don't materialize.
That puts a lot of pressure on the bankruptcy provision's top Senate
supporters, Majority Whip Richard J. Durbin (D-Ill.) and Charles Schumer
(D-N.Y.), who will have to use the congressional recess to rally
reluctant colleagues to back the controversial mortgage proposal.
Durbin has waged a long campaign to win passage of the bankruptcy
measure, which he believes would help prevent foreclosures. Opponents
warn it would raise mortgage rates for all borrowers if mortgage lenders
are forced to take on the cost of reducing principal and interest rates
in some bankruptcy cases.
Key Senate offices, mortgage lenders and industry groups are negotiating
this week and next week to figure out if there is any room for
compromise.
Sen. Evan Bayh (D-Ind.) has been among the moderate Democrats seeking to
narrow the bankruptcy language. There has also been a rotating group of
Republicans engaged on the issue, including Sen. Arlen Specter of
Pennsylvania.
The American Bankers Association, the Credit Union National Association
and the Independent Community Bankers of America are involved in the
talks, representing the banking and mortgage industries. The Center for
Responsible Lending, a consumer advocacy group that backs the proposal,
has also been intimately involved in the negotiations.
Republican and industry critics view the drawn-out negotiations as
evidence that Democratic supporters don't have the votes. The House
passed a broad bankruptcy provision that even moderate Democrats
consider too generous in terms of who could access bankruptcy for
foreclosure relief. At the other end of the spectrum is a proposal to
limit the bankruptcy option to subprime mortgages only, a non-starter
for Durbin and Schumer.
Democratic negotiators hope there's middle ground between these two
ideas.
"Those are the two bookends; we're trying to find the sweet spot in the
middle," a Democratic aide familiar with the talks said, adding that
there is a "good chance" they will have a bill ready for floor action by
the conclusion of recess.
But the negotiations are clearly sensitive, with outside participants
saying they've been more or less sworn to secrecy over the substance of
the discussions.
One source close to the negotiations interpreted Reid's statements about
dropping bankruptcy from the broader housing measure as an attempt to
increase the pressure on the proposal's most ardent supporters to start
compromising.
"I would disagree with the notion that the issue is dead," the source
added, suggesting Reid's warning had the desired effect.
The financial services lobbyists at the table have their own motivations
for making a good faith attempt to craft a bill they can swallow. The
economic slowdown has left the industry hurting and the Senate in a
position to help craft a broad housing bill that may help the industry
while downsizing the impact of any cramdown provision. That's opened at
least some minds in the industry, after fighting the bankruptcy change
tooth and nail for more than a year.
One provision that banks like in the Senate bill is a proposal to
increase the Federal Deposit Insurance Corp.'s borrowing authority in
order to avoid the FDIC charging higher fees. The fix was included in
the housing bill in the House - along with the more controversial
bankruptcy proposal.
M. Erik Clark
Borowitz, Lozano & Clark, LLP
100 N. Barranca Avenue, Suite 250
West Covina, CA 91791
www.blclaw.com
Office: (626) 332-8600
Fax: (626) 332-8644
Board Certified in Consumer Bankruptcy
American Board of Certification

The post was migrated from Yahoo.