A Cram-Down DealApril 16, 2009 - by Donny Shaw
Congress’s leading bill to address the foreclosure crisis has been stuck in the Senate for the past five weeks, but a deal may have finally been reached. It looks like the main provision of the The Helping Families Save Their Homes Act of 2009, which would let bankruptcy judges rework mortgages for homeowners facing foreclosure, including a “cram-down” of the principle, would be significantly weakened.
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.
In early March, when the bill went through the House, California Democratic Reps. Ellen Tauscher, Zoe Lofgren and Dennis Cardoza added an amendment directing bankruptcy judges to consider whether a loan modification consistent with President Obama’s plan was offered prior to the consideration of a judicial modification. The Senate deal would take this guideline and turn it into a strict rule: if the lender makes an offer to refinance at a lower rate, the judge can not intervene to make changes to the terms of the mortgage. It gives lenders final control over how loans can be reworked, not the judges.
It would also mean that the mortgage lenders wouldn’t be forced into taking losses. More homeowners would end up with the interest reductions from Obama’s plan, which would come at a cost to the government, not to the banks. Obama’s plan includes a dollar-fordollar matching fund to help bring down interest rates for borrowers and a $1,000 upfront bonus for lenders each time they adjust the interest rates of a loan.
Rep. Brad Miller [D, NC-13], who has been the leading cram-down advocate in Congress, has said the banks are opposed to the cram-downs because they would be shown on their already damaged balance sheets. They want to avoid acknowledging that the mortgages on their books are actually worth a lot less than what they are claiming. It would make it even more obvious that many of the big banks are essentially insolvent zombies. Stretching out payment plans and lowering interest through the Obama plan, on the other hand, would not affect their books. This really isn’t a surprise because it has been the trend in all our economic policies recently — protect the appearance of the banks’ balance sheets and put the costs of the economic crisis on the government.
Here are the other details CongressDaily provides on the deal in the Senate:
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.