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Preventing Foreclosures - Why the Delay?

March 2, 2009 - by Donny Shaw

There’s something happening behind the scenes with Congress’s portion of the Obama foreclosure prevention plan, but it’s hard to figure out exactly what it is.

For weeks, the financial industry, Republicans, and centrist House Democrats have been fighting a provision in the bill (H.R. 1106) that would allow judges to modify the terms on mortgages for homeowners that go into bankruptcy. This provision, commonly referred to as “cram-down,” is the “stick” in Obama’s plan; the mechanism that will encourage lenders to modify subprime mortgages so they are more affordable to struggling homeowners. The “carrot” in the plan is that lenders that modify loans voluntarily will be given cash bonuses from the government – $1,000 for each loan modified, more if borrowers stay current on their payments.

While the carrot option is estimated to cost the government $75 billion, the cramdowns would come at no cost to the government.

Opponents call the provision “overly broad.” They argue that the courts would end up modifying too many mortgages, creating additional risk for lenders and scaring off banks from lending in the future.

The New Democrats Coalition, a 63-member group of moderates in the House, has been pushing the Democratic leadership to make changes to the cram-down provision, and, as David Waldman points out, they have basically won. According to Tauscher’s office, the changes, which were virtually cleared for passage by the vote approving the rule governing debate, include using FHA appraisal standards to determine a home’s value, requiring that the loan be “unaffordable” and not just more than the current home value, and several more. See the full list here.

But after the New Democrats’ victory last week, House Speaker Rep. Nancy Pelosi [D, CA-8] pulled the bill from the floor in what is being widely being reported as a second victory for the New Dems. Here’s how CongressDaily (subscription-only, but reprinted by Atlantic) reported it, for example:

Moderate House New Democrats showed their influence Thursday after they forced changes and later stalled consideration of legislation allowing bankruptcy judges to modify home mortgages, including reducing the principal of a loan.

And New Democrat Chair Rep. Ellen Tauscher [D, CA-10] on the bill being pulled:

It shows we have bench strength, and it shows we can flex.

The bill is now scheduled to be back on the House floor Thursday. The big question is, if the New Democrats have already won their changes, what is the delay for?

In a separate CongressDaily ($) article, “tightening standards for a homeowner to enter bankruptcy” is listed as one of the changes to the bill that New Dems were pushing for. The only thing I see in the list of changes as described by Tauscher’s office that could possibly fit that is item #5 – “Specify that in addition to a phone call requesting a loan modification, the debtor must certify that he/she provided income, expenses, and debt to the holder of the mortgage.” But that seems pretty minor, while “tightening standards for a homeowner to enter bankruptcy” could potentially encompass much more. It’s possible there are additional changes along those lines being worked out behind the scenes. Depending on the details, changes fitting that description could severely reduce the effectiveness of the “stick.”

Back to the first CongressDaily article (read it here):

Sources close to the process said House Speaker Pelosi wants to pass the bill soon. And while Judiciary Chairman John Conyers, who sponsored the bill, said Thursday he did not foresee further changes, other Democratic aides and lawmakers said they did not see that as realistic.
“I don’t think this is going to get fixed without going back to Rules,” said one aide.
Rep. Allen Boyd, D-Fla., a prominent Blue Dog Coalition member, told CongressDaily Thursday it is his understanding Democratic leaders plan to send the bill back to the Rules Committee next week to make additional changes along the lines of those called for by New Dems like Rep. Ellen Tauscher, D-Calif., the coalition’s chairwoman.

UPDATE: Some initial indications of what the new compromise with the New Democrats will look like (Bloomberg):

House leaders are embracing a plan being pushed by the New Democrat Coalition, which calls itself a group of “moderate” legislators. The group’s plan would require borrowers to seek loan modifications from their banks before qualifying for changes in their mortgage terms through bankruptcy protection.
“More along the lines of trying to ensure that before you get there, there has been a good-faith effort to utilize other programs available,” Hoyer told reporters.
Under the compromise, bankruptcy judges would have the discretion to decide whether banks had offered a “qualified loan modification” that would bar borrowers from cramming down their mortgage in bankruptcy, according to an e-mailed summary of changes being circulated by Democratic staff.

Sounds like a pretty mild change to me. I’ll update with the specifics as they become available.

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