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Next Up on the Moderates' Chopping Block: Foreclosure Prevention

March 28, 2009 - by Donny Shaw

In February, President Obama announced a plan to help families with troubled mortgages stay in their home. One of the key components of the plan, giving judges the power to modify loans for homeowners in bankruptcy, requires approval from Congress (H.R. 1106), but Senate moderates are threatening to block it for now and to push for a weaker version of the provision down the road.

Congress Daily ($) reports:

Reid Might Drop Cram-Down Provision From Banking Bill

Senate Majority Leader Reid said today he would drop a cram-down provision from a House-passed banking bill if the language threatened to keep the Senate from passing the overall bill. The provision would allow a bankruptcy judge to reduce a homeowner’s mortgage principal. “If we can’t get the votes for that, and I am hopeful we can – I am semiconfident we can – then what I’ll do is take that off [the bill] and do the other banking provisions,” Reid said at a Christian Science Monitor breakfast. Reid said he would work to keep the package intact, but raising the prospect of pulling the provision seemed to acknowledge assertions by Sen. Evan Bayh, D-Ind. [pictured at right], and others that the cram-down bill cannot pass due to opposition from Republicans and some Democratic moderates.

Bayh and Judiciary ranking member Arlen Specter are pushing an alternative bill that narrows the range of borrowers who could have their mortgage principal reduced. Lobbyists tracking efforts by Senate Majority Whip Durbin to drum up industry and Senate support for a measure like the House bill said talks appear stalled. Eliminating or watering down the cram-down provision would be a win for the banking industry and Sen. Bob Corker, R-Tenn., who has pushed to move banking provisions separately from the cram-down measure. Democrats hope to move the package after the spring recess.

The “cram-down” provision is the “stick” in Obama’s plan; it is the mechanism that is designed to encourage lenders to actually modify at-risk mortgages so they are more affordable to struggling homeowners. The “carrot” in the plan is that lenders who modify loans voluntarily (making a “cram-down” unnecessary) will be given cash bonuses from the government – $1,000 for each loan modified, and 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.

The Senate moderates are probably going to push a version of the cram-down that applies only to homeowners with subprime loans. David Waldman at Congress Matters – noting the contradiction in not wanting to reward irresponsible borrowers, but limiting the bill to apply to probably the least responsible borrowers of all – provides a possible explanation for what might actually be behind this:

The answer, I think, is that the subprime problem has already done the bulk of its damage to the banking industry, so they don’t stand to lose much more if the bill is limited in that way. Plus, most people know that “subprime” is a term connected to “problem” mortgages, and if they’re paying any attention at all, they’ll simply think something that sounds good – mortgage relief – was given to people having “problems,” and they’ll never inquire any further than that.
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