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May 1st, 2009

Cramdown bill goes down to defeat

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The Senate’s latest attempt to let judges arbitrarily change the term of mortgages for homeowners who have declared bankruptcy went down to defeat as expected yesterday:

For the second time in two years, a provision to allow bankruptcy judges to modify mortgages died in the Senate today, handing the Obama administration a significant defeat in its plans for arresting the foreclosure crisis.

Supporters argued the measure would keep 1.7 million borrowers in their homes, but it ultimately foundered in the face of fierce financial industry and Republican opposition. The bankruptcy modification provision, which was offered an amendment to a broader housing bill, failed by a vote of 45 to 51.

Just 45 of the 59 Democratic Senators voted against it, as well as every Republican Senator, signalling that even with a majority, President Obama can’t count on automatic support for all of his legislative priorities. Senator Tom Carper (D-DE) noted that he opposed it because cramdowns wouldn’t have been limited to subprime mortgages, which have long been fingered as the primary cause of the mortgage-market meltdown.

We’ve always thought that cramdowns are a bad idea. As we pointed out, the measure is highly controversial:

Proponents, which include many Congressional Democrats and community groups, argue that cramdowns will reduce foreclosures and, eventually, discourage bankruptcy filings on the theory that lenders will be more inclined to work with borrowers who are in trouble.

Mortgage cramdown legislation, if passed, would likely lead to rising losses for home equity and credit card lenders, while also reducing housing affordability, Friedman, Billings, Ramsey & Co. analyst Paul Miller wrote …

In bankruptcy proceedings, Miller said judges are likely to wipe out home equity loans or lines of credit and credit card debt from customers, leaving those lenders with losses as the primary mortgage is modified. Financial firms with large portfolios of those types of loans are likely to see even greater losses than they’ve already been facing amid the downturn in the housing market and ongoing recession. [...]

An even bigger issue, should cramdowns for ‘prime’ mortgages be allowed, is that lenders will no longer be able to lend mortgage money secure (as it were) in the knowledge that their contract was binding. That would work to reduce homeownership:

Forcing cramdowns upon lenders will also result in even tighter and more rigorous qualification procedures, which would result in fewer mortgages being written. That won’t please anyone, least of all those banks which are being told by Congress to “make more loans!” while simultaneously being lectured by their regulators to “make safer loans!”

The amendment’s sponsors aren’t giving up, though the odds of passage are slim at the moment.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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