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Round Two: Stimulus for Subprime Sufferers

February 21, 2008 - by Donny Shaw

(Updated Below)

Congress is preparing for a second round of economic stimulus, but it ’s not shaping up to include the extended unemployment insurance benefits and additional food stamp assistance that was dropped from the first stimulus bill. Instead, it looks like the next stimulus bill will contains more business tax breaks and a measure to help out home owners facing foreclosure as a results of the subprime mortgage mess.

A bill from Brad Miller (D-NC) and Linda Sanchez (D-CA) to change bankruptcy laws by allowing judges to renegotiate the terms of home mortgages during bankruptcy proceedings would be the central element of the new stimulus bill.

Congressional Quarterly reports this afternoon:

>Senate Democratic leaders will try to move housing-focused stimulus legislation early next week that contains a controversial change to bankruptcy law and tax breaks for businesses.
>Senate Majority Leader Harry Reid , D-Nev., has set the stage for a vote as early as Feb. 26 to limit debate on a motion to proceed to a leftover House-passed energy bill that would be stripped of its original content and become the vehicle for the housing package.
>A House-passed bill is needed because the Senate housing plan includes tax provisions, and under the Constitution, tax bills must originate in the House. Other provisions of the old House energy bill were enacted separately at the end of last year.
>Reid could face difficulty marshalling 60 votes for the proposal, however.

Opposition to the Miller-Sanchez bankruptcy proposal extends beyond the mortgage industry and congressional Republicans. The moderate-to-conservative bloc of congressional Democrats, the Blue Dog Coalition, opposes the proposal too. In November, sixteen of them, sent a letter to House Judiciary Committee Chairman John Conyers (D-MI) asking him not to move forward with the bill because it could compromise the implementation of a bankruptcy law they helped to enact in 2005. The letter can be viewed here; here’s an excerpt:

>A goal shared by Blue Dog supporters of BAPCPA [the 2005 law] is ensuring that those with the ability to pay back at least some of their debts do so, while preserving access to the bankruptcy system. Unfortunately, those who abuse the bankruptcy system end up penalizing other Americans who choose to work hard and pay their debts, and who still find it a challenge to obtain credit.

Coincidentally, BAPCPA has recently been revisited and skewered in the blogosphere for being primarily a gift to creditors at the expense of the economy.

In December, Brad Miller and Linda Sanchez held a series of open online discussions about their bill on the blogs Daily Kos, TPM Cafe and OpenLeft. The discussions brought together citizens, legal experts and legislators, and the comment threads that remain at those links are great places to look for real, substantive discussion on the bill. Here’s how Brad Miller on where his bill came from and what it’s all about:

>When I asked around early this year about what Congress could do about the foreclosure epidemic, a couple of bankruptcy judges suggested that Congress could just let bankruptcy courts modify home mortgages the same way bankruptcy courts can modify mortgages on family farms. In fact, home mortgages are the only form of secured debt that is exempt from modification in bankruptcy. A bankruptcy court can modify a mortgage on investment property, a car loan, or a loan secured by a washer and drier, but not a home mortgage. Does that make sense to you? No, it doesn’t make any sense to me either.
>So Linda and I introduced a bill that would eliminate the exemption of home mortgages from modification by a bankruptcy court. There’s a well established body of law on how a bankruptcy court can modify a secured debt: If the debt exceeds the value of the collateral, the court can limit the debt secured by the collateral to the value of the collateral and treat the rest as unsecured, which goes to the back of the line for payment. And the court can then set a term of up to thirty years and an interest rate of prime plus a couple of points, because someone in bankruptcy is a greater risk than the typical debtor.
>In other words, the lender will end up with the mortgage the lender should have made in the first place — a subprime mortgage, but not a predatory mortgage.
>According the CRL, 600,000 or so families to save their homes from foreclosure under this legislation. The chief economist for Moody’s thinks that’s an exaggeration—probably only 500,000 families would save their homes.

No word yet on what business tax provisions will be included in this new stimulus bill. We’ll update as soon as we hear something.

UPDATE: The stimulus bill containing the bankruptcy provision has actually been introduced already. It can be viewed here:

S.2636 – Foreclosure Prevention Act of 2008

Technically, the bill’s bankruptcy provision is borrowed from the Senate version of the Miller-Sanchez bill. It’s basically the same bill — in fact, it was introduced right after it as a companion measure — so everything above still stands. The new stimulus bill also encompasses S.2153, the Mortgage Disclosure Improvement Act and a provision to allow businesses to write off their losses from 2006, 2007, 2008 and apply them to more profitable years as far back as 2001.

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