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Cram Down Bill
Sources Say Possible Deal In Works On Cram-Down Bill
Wednesday, April 15, 2009
by Bill Swindell
After weeks of negotiation, a compromise may have emerged over Senate
legislation that would give bankruptcy judges greater power to modify home
mortgages, including reducing the principal. Lenders have been fighting the
proposal, arguing that it would bring more uncertainty to the mortgage
market and result in higher interest rates. But bank critics say such
powers, especially allowing a judge to reduce the principal, are necessary
to help homeowners on a wide basis and halt declining prices. The potential
deal, according to sources, would add teeth to a House-passed bill that
would allow a judge to consider whether the lender has offered the homeowner
a new Obama administration plan to help up to 9 million borrowers avoid
foreclosure by allowing them to refinance at lower interest rates. The
Senate compromise would mandate that if a lender offered a modification
through the Obama plan or a program included in last year's housing bill,
called the Hope for Homeowners Act, the homeowner would be ineligible to
modify their loan through bankruptcy.
The possible deal has other provisions. At-risk low-income borrowers and
those who pay less than 31 percent of their income for mortgage payments
would be ineligible for principal reduction, but they could have their rates
reduced or their loans amortized over a longer time. If a homeowner opted
for a modification under the Obama plan and wound up paying a quarter of
income or less for the mortgage, he or she would be ineligible for any
bankruptcy modification. If the principal is reduced by a judge, the
possible compromise would allow the lender and borrower to evenly split any
profit up to the original amount of the loan if it is sold while the
homeowner is still in bankruptcy. Only loans that originated before 2009 and
amount to less than $729,750 could be modified in bankruptcy. The program
would end in 2014.
All sides cautioned that no final deal has been struck and that negotiations
could easily fall apart, especially as banks, credit unions and consumer
activists each stake out their position in negotiations led by staffers for
Senate Majority Whip Durbin. Citigroup Inc. signed on to an earlier
compromise, but other lenders have argued that more limitations need to be
placed on the availability for principal reduction. Rep. Brad Miller,
D-N.C., has said that banks are reluctant to write down such losses through
a process known as "cram-down" because it would show up on their already
battered mortgage portfolio. "There are a variety of different proposals
that are in writing. Nothing has been agreed to," said Durbin spokesman Max
Gleischman. "We were exactly at the same place we were at last week." The
measure is likely to be combined with other banking provisions, including
lifting the cap on the number of business loans that credit unions can make.
It would also likely expand eligibility for Hope for Homeowners and increase
the FDIC's borrowing authority up to $500 billion for a limited time to give
the agency resources to address the banking sector's problems. The FDIC
language would allow the agency to lower fee assessments that it had
recently increased on banks to handle the rise in failing institutions. One
source said the banks believe that whatever they may lose via the expanded
bankruptcy process could be made up through the lower fee assessment.
Another source said the banks made the offer to Durbin and felt that he
would likely accept the language
Dianne Crandell Kerns
Chapter 13 Trustee
(tel) 520/544-9094
(fax) 520-544-7894
David A. Tilem
Certified Bankruptcy Specialist*
Law Offices of David A. Tilem (a debt relief agency)
206 N. Jackson Street, #201, Glendale, CA 91206
Tel: 818-507-6000 Fax: 818-507-6800
* Bankruptcy specialist cert. by State Bar of CA Bd of Legal
Specialization.
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Sources
Say Possible Deal In Works On Cram-Down Bill
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