US House Panel Approves 'Cram Down' Mtge Relief
January 27 2009 - 6:23PM
Dow Jones News
A measure to allow judges to reduce the principal amounts of
mortgages for troubled borrowers in bankruptcy cleared a key hurdle
Tuesday when it was approved by a U.S. House panel.
The legislation, which is progressing quickly in Congress, would
amount to the most aggressive step yet by the federal government to
help strapped borrowers avoid foreclosure.
Proponents contend it will act like a stick, spurring mortgage
servicers to complete more loan modifications. Meanwhile, the
banking industry warns that it will raise mortgage costs for all
borrowers.
The measure was approved on a 21-15 vote after its House
sponsor, Judiciary Chairman John Conyers, D-Mich., agreed to
changes that would narrow its scope.
"While bankruptcy reform may not provide all of the answers to
this crisis, surely it provides a common sense and practical
approach to helping stop the spiral of home foreclosures," Conyers
said in remarks before his panel.
Under the legislation, borrowers would be eligible to have a
bankruptcy judge reduce the principal balance on their home loan -
a move known as a "cram down." Current law allows cram downs for
mortgages on vacation properties, but not for those on primary
residences.
After stalling in Congress last year, the legislation has gained
traction in recent weeks due to the shift in power in Washington
and the growing perception that mortgage servicers have not done
enough to help strapped borrowers.
House Speaker Nancy Pelosi, D-Calif., said Thursday the measure
was a "very high priority" that could move soon, possible as part
of the economic stimulus legislation. More likely, it will be
attached to other fast-moving legislation, such as a spending
bill.
In key concessions to the banking industry, Conyers agreed to
alter the legislation to allow court-ordered modifications only for
existing mortgages and to require that borrowers contact their
lender at least 15 days before filing bankruptcy. Citigroup Inc.
(C) had demanded the changes in exchange for throwing its weight
behind the bill, a move that angered the rest of the industry.
In another change, the legislation will now require recipients
of cram downs who resell their home within five years to share the
proceeds with their lender.
The panel also added language dissuading bankruptcy judges from
shrinking the principal amounts of mortgages guaranteed by the
Federal Housing Administration, the Veterans Administration or the
Department of Agriculture. Under current law, the government cannot
guarantee or insure amounts that have been crammed down on such
loans.
The panel approved a Republican amendment barring people who
committed mortgage fraud from receiving court-ordered
modifications.
Though banking lobbyists favor the changes, they remain
staunchly opposed to the legislation. Even though it applies only
to existing mortgages, they contend it will raise costs on new
mortgage loans because lenders will assume Congress will extend the
legislation.
"The housing market is already contracting and enactment of cram
down legislation would make things even worse by injecting more
risk into the mortgage market, making it harder and more costly for
people to buy and sell homes," a coalition of industry groups wrote
in a letter to Conyers and Rep. Lamar Smith of Texas, the panel's
top Republican.
In the letter, they warned that court-ordered modifications
would trigger more losses at Fannie Mae (FNM) and Freddie Mac
(FRE), which own or guarantee more than $5 trillion of U.S.
mortgages. Those losses would flow through to the U.S. government
because it has agreed to pump money into the firms to keep them
solvent.
Industry lobbyists also argued that mortgage servicers would
shun federally insured loans because, despite Conyers' changes, the
legislation doesn't protect such loans from being crammed down by
the courts.
Several GOP amendments to limit the scope of the bill failed,
including language to require borrowers to complete credit
counseling before receiving court-ordered modifications.
The panel rejected amendments to limit cram downs to subprime
and other non-traditional loans. An amendment to limit
court-ordered loan modifications just to mortgages originated
during the subprime heyday also failed.
Finally, the panel voted down an amendment to impose criteria
for how bankruptcy judges modify mortgages. The measure would have
required them to target modifications such that borrowers' monthly
mortgage payments are no less than 31%, and no more than 38%, of
monthly income.
-By Jessica Holzer, Dow Jones Newswires; 202-862-9228;
jessica.holzer@dowjones.com
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