UPDATE: House Panel Begins Debate On 'Cram Down' Mtge Relief
January 27 2009 - 5:03PM
Dow Jones News
A U.S. House panel began debating legislation Tuesday to allow
judges to modify mortgage loans for people in bankruptcy, after a
key Democrat agreed to changes narrowing its scope.
The legislation, which is progessing quickly in Congress, would
amount to the most aggressive step yet by the federal government to
help troubled borrowers hang on to their homes. The banking
industry warns that it will raise mortgage costs for all other
borrowers.
"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," said
Judiciary Committee Chairman John Conyers, D-Mich., the bill's
House sponsor, in opening remarks.
Under the legislation, borrowers could have the principal
balance on their home loan reduced by a bankruptcy judge - 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 as part of the
economic stimulus legislation or as a stand-alone bill. It is
expected to pass the Judiciary Committee on Tuesday in a party-line
vote.
In key concessions to the banking industry, Conyers agreed to
limit court-ordered modifications only to 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.
Conyers also agreed to require recipients of cram downs who
resell their home within five years to share the proceeds with
their lender. He also added language dissuading bankruptcy judges
from cramming down federally insured mortgages.
Guarantees on mortgages insured by the Federal Housing
Administration, the Veterans Administration and the Department of
Agriculture do not apply if the mortgages are reduced by court
order.
Though banking lobbyists favor the changes, they remain
staunchly opposed to 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.
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.
Panel members were moving toward consensus on a Republican
amendment barring people who committed mortgage fraud from
receiving court-ordered modifications. However, several other GOP
amendments to limit further the scope of the bill failed.
The panel voted against including language to require borrowers
to complete credit counseling before receiving court-ordered
modifications.
It also rejected a Republican amendment to impose criteria for
how bankruptcy judges modify mortgages, including requiring them to
target modifications such that borrowers' monthly mortgage payments
are no less than 31%, and no more than 38%, of monthly income.
The panel also rejected a Republican amendment, offered by Rep.
Trent Franks of Arizona, to limit court-ordered loan modifications
just to mortgages originated between Jan. 1, 2004, and Dec. 31,
2007, during the peak of the sub-prime boom.
-By Jessica Holzer, Dow Jones Newswires; 202-862-9228;
jessica.holzer@dowjones.com
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