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What the Bipartisan Housing Bill May Look Like

April 1, 2008 - by Donny Shaw

(Updated below)

In a surprise move, the Senate today came together and agreed to work on passing a bipartisan foreclosure prevention bill. But such a bill has yet to be written — the task has been given to Banking Committee Chairman Chris Dodd (D-CT) and the Committee’s ranking Republican, Richard Shelby (AL). They’ll be drafting the bill tonight and plan to have it on the Senate floor by noontime tomorrow.

The most contentious issue they will have to iron out is a Democrat-favored measure to allow bankruptcy judges to modify the terms of mortgages for homeowners who are facing foreclosure. Republicans call this measure a “cram down,” and argue that it would increase interest rates by lowering investors’ confidence that they would be assured of their rate of return on a loan. MarketWatch is reporting a tip from Stanford Group analyst Jaret Seiberg, that a bankruptcy provision offered by Rep. Barney Frank (D-MA) will likely serve as the backbone for an initial Dodd-Shelby agreement on the issue:

>Under the Frank bill, lenders would reduce the principal of the mortgages to take account the new lower value of the home. The borrower would get a fixed rate loan from the Federal Housing Authority. In return, the government would get a small stake in the home.
>The program would be capped at $300 billion.

Arlen Specter (R-PA) also has an alternative bankruptcy proposal that is likely to come up as a floor amendment when the bill is debated, and it very well may find enough support to pass. His proposal has been introduced in the Senate as an alternative to the Democrats’ bankruptcy proposal. Here’s part of an older article from The Hill that explains the ways the Specter bill differs:

>The Specter bill would grant more modest powers to bankruptcy judges to help borrowers stave off foreclosure. It would also apply to a smaller pool of borrowers: homeowners whose mortgages were issued prior to Sept. 26, 2007, who seek relief in the next seven years.
>According to Durbin, the biggest sticking point in his discussions with Specter is the leeway given to bankruptcy judges to work out better payment schedules for borrowers. Under the Specter legislation, lenders would be able to veto any new terms.

And the Associated Press this afternoon gives a rundown of some other parts of the leading Democratic foreclosure prevention bill that may be included in the Shelby-Dodd bill:

>The legislation is likely to draw on elements of the Democratic plan such as letting states issue $10 billion in tax-exempt bonds to refinance subprime loans and permitting homebuilders and other money-losing businesses to reclaim previously paid taxes.
>Democrats also want to provide $4 billion to states to buy up and refurbish foreclosed homes, a plan that the administration opposes as a bailout for lenders and speculators.
>The upcoming bill also is sure to attract a GOP amendment by Sen. Johnny Isackson of Georgia to award $15,000 tax credits to people who buy and move into foreclosed homes. That would sharply boost demand, Isackson says. Lawmakers in both parties support the idea
>The measure is also likely to include a plan by Dodd to have the Federal Housing Administration guarantee hundreds of billions of dollars worth of refinanced loans if lenders reduce loan amounts to reflect reduced home values. The measure would force banks to make less money on the loans but would also reduce their credit exposure.

Some of these provisions, particularly the $4 billion in Community Development Block Grants for states to fix up foreclosed homes, seem like bargaining chips. We’ll keep you posted as the bill continues to shape up.


The Tuesday morning edition of CongressDaily has the latest scoop on how the two most contentious provisions — the change in bankruptcy law and the the FHA mortgage insurance program — will figure into the bill. Since it’s a subscription only source, here it is, copied and pasted:

>The package is not expected to include a measure sponsored by Majority Whip Durbin that would change bankruptcy law for owner-occupied homes in foreclosure, giving judges more leeway to change the terms for the mortgage.
>Under the Durbin measure, if a homeowner owed $200,000 on a house now valued at $150,000, the judge could write off the $50,000 difference as secured debt that the lender could not recover.
>Banks contend the Durbin provision would raise the cost of mortgages because investors would be unsure whether they would be able to generate revenues on loans that they financed. It is likely to be voted on as a standalone amendment.
>The major question is over whether floor amendments will need a simple up-or-down vote for adoption or a filibuster-proof 60 votes, which would make adoption of the Durbin amendment unlikely.
>Republicans are pushing for a 60-vote threshold to ensure that the Dodd-Shelby substitute could not be tinkered with before a final vote.
>If the Durbin amendment fails, the Senate is likely to approve a competing measure by Judiciary ranking member Arlen Specter that would allow a judge to readjust interest rates and waive prepayment penalties, but not restructure the principal of loan. Banks have less opposition to the Specter measure.
>The negotiations also might involve a final deal over the FHA mortgage insurance program. The House and Senate have both passed their respective measures, but negotiations have been stalled over how much to raise loan limits.
>In the beginning of the year, FHA loan limits were set at $362,000. But the economic stimulus package raised the cap to $625,500. In addition, limits in some high-cost areas were allowed to increase to almost $730,000 under the bill.
>House Financial Services Chairman Barney Frank has been a proponent of raising the cap, especially in high-cost areas such as California and Massachusetts. Shelby opposes such a large increase, saying “it only affects a few people.”
>Sen. Mel Martinez, R-Fla., suggested Tuesday that both parties split the difference and set the limit at $500,000.
>"If we could do that [it] would be good," Shelby said of the FHA bill. “If we can’t, then we are in a conference on that.”

Now’s the time to call your senator to tell them what bankruptcy provision — if any — you want in the bill, and where you want the FHA loan limit cap set.

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