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New Democrats Strike a Cramdown Deal

March 3, 2009 - by Donny Shaw

As I’ve been writing about recently on this blog, a group of moderate House Democrats, the New Democrats Coalition, has been holding up passage of a major component of President Obama’s foreclosure prevention plan, the Helping Families Save Their Homes Act. The New Democrats have concerns about the “cramdown” provision in the bill, which would allow the courts to modify terms and reduce the principle on primary-residence mortgages that are going into foreclosure. Like the banking industry, they worry that the provision is overly broad and that the courts new powers could result in big losses for the banks, thus discouraging them from lending in the future.

For the past few days, the New Dems and the House leadership have been engaged in behind-the-scenes negotiations over the cramdown provision, and they have finally decided on a way to move forward. A New Democrat-sponsored secondary amendment will be offered to John Conyers’ manager’s amendment, and together they will account for all the concessions to the bill that the moderates appear to be requiring for their support.

Jane Hamsher at FireDogLake has obtained a copy of a “Dear Colleague” letter being circulated on the Hill by New Democrat Chairwoman Rep. Ellen Tauscher [D, CA-10] (pictured), Blue Dog Rep. Dennis Cardoza [D, CA-18] and California Democratic Congressional Delegation Chairwoman Rep. Zoe Lofgren [D, CA-16] explaining all the concessions they have won and asking their colleagues to support the bill.

Major changes made to H.R. 1106

During Committee consideration:

1. Judicial modifications were limited to existing loans.
2. A “clawback” provision was included to specify that increases in property values over the first four years of the bankruptcy plan would be returned to the lender, based on a sliding scale.

The manager’s amendment and second-degree Lofgren-Tauscher-Cardoza amendment made a number of additional changes, including:

1. Ensuring that a judge considers whether a qualified loan modification that is consistent with President Obama’s plan was offered prior to considering a judicial modification;
2. Incorporating the Administration’s debt-to-income and interest rate limits as considerations for determining whether an interest rate reduction in lieu of a principal reduction is warranted;
3. Changes to ensure that judges use FHA appraisal guidelines in determining the fair market value of a property;
4. Improvements in the predictability of payouts by mandating that the debtor make equal monthly payments on their restructured debt;
5. Specifications in the pre-filing requirement that in addition to a phone call requesting a loan modification, the debtor must certify that he or she provided information on income, expenses, and debts to the holder of the mortgage;
6. Extending the pre-filing requirements to request a qualified loan modification from 15 days to 30 days to allow sufficient time for the loan modification process;
7. Changes to ensure that judges must deny judicial modification in cases where the debtor could otherwise afford the loan. This will prevent wealthy people from taking advantage or falling real estate prices;
8. A GAO study to determine whether Chapter 13 proceedings are working to prevent foreclosures and the effect this is having on access to credit;
9. Extending FHA, VA and rural housing assistance guarantees to adjustments as a result of judicial loan modifications.
10. Amending the “clawback” provision to increase the amount of appreciation owed to the lender in the case of a home sale during the bankruptcy.

The complete legislative text of the Lofgren-Tauscher-Cardoza amendment can also be viewed as a pdf file.

As Chris Bowers at OpenLeft notes from a CQ ($) article, the deal on the amendment was also worked out with some Senate staff, so the bill may have a better chance at getting through the Senate intact than had previously been thought.

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