Sunday, August 1, 2010

Congress Faces Another Round Of Cramdown Debates


Now that the Capitol Hill debate on financial regulatory reform is over, the next big issue on the congressional agenda might be a return of the bankruptcy cramdown debate.

According to Will White, senior policy adviser to Senate Banking Committee member Sen. Jeff Merkley of Oregon, cramdowns - which have been vigorously opposed by the mortgage banking industry - are again rumored to be among the foreclosure prevention tools being considered by members of Congress.

White, speaking yesterday at the American Legal & Financial Network's (ALFN) 8th Annual Leadership Conference in Washington, D.C., suggested that the Senate may be revisiting the proposal, which would grant bankruptcy judges the authority to modify debt relating to borrowers' principal residences. The most recent attempt to enact cramdowns passed the House of Representatives last year before stalling in the Senate.

"I think to the extent that the foreclosure problem stays as dire as it is today, there may be a revisiting of the bankruptcy legislation," White commented. "That's to deal with the mortgages that are just completely out of proportion to the value of the homes. That's really a regional issue. There are some places where that's an acute issue and others where that's really not a large factor."

While the mortgage banking industry extensively lobbied against cramdown legislation, other entities are supporting the concept. Julia Gordon, senior policy counsel for the Durham, N.C.-based Center for Responsible Lending (CRL), characterized cramdowns as the sole solution to the broad range of issues identified as obstacles to loan modifications problems.

Also speaking at the ALFN event on Monday, Gordon noted that, while the Home Affordable Modification Program (HAMP) seems to have been crafted as a response to the subprime crisis, it does not suitably address the issues of negative equity, high levels of back-end consumer debt, and pooling and servicing agreement restrictions to modification.

"There so far has only been one solution floated out there that actually addresses all of these problems at one time and that's changing the bankruptcy code to permit judicial modifications of first mortgages," Gordon said. "Nobody is suggesting that 6 million people go through bankruptcy - that would not be possible, let alone desirable. But (the cramdown) would be the critical stick, if you will, to the HAMP carrot or other incentives to make sure that these loans get dealt with in an appropriate way and in a reasonable time frame."

Gordon added that the CRL projected that without any major policy change, between 5 million and 6 million owner-occupied homes will go through to foreclosure sale in the next three years.