Cramdown Legislation Could Be Revived to Ease Foreclosures

U.S. Rep. Barney Frank (D-Mass.) and other leading Democrats have indicated that they may try again to pass "cramdown" legislation giving bankruptcy judges authority to modify mortgages if lenders don't do a better job of assisting at-risk homeowners.

At a House Financial Services Subcommittee hearing this week, Frank, who chairs the committee, expressed disappointment over the lack of progress being made by the mortgage industry in working out loan modifications for homeowners facing foreclosure. He and other Democrats have said they believe "cramdown" legislation is needed to get lenders to take loan modifications seriously.

"The servicers are not going to change," said Rep. Al Green (D-Texas) during the hearing. "So if we know that, then we have to do something different."

Already applies to boats, vacation homes

Cramdown legislation would allow judges to modify the terms of a home mortgage during bankruptcy proceedings, including reducing the principal and/or interest rate. Bankruptcy courts already have the authority to do so for vacation homes, boats and certain other personal debts but not for mortgages on primary residences.

The House of Representatives passed a cramdown bill earlier this year but it was blocked in the Senate. The bill has been generally opposed by Republicans and the lending industry.

"Bankruptcy cramdown would seriously prolong our housing recovery by decreasing mortgage credit," said Rep. Spencer Bacchus (R-Ala.), in his opening statement. He went on to say that such legislation "would prolong our housing recovery by adding uncertainty to the market and increasing mortgage costs for the vast majority of Americans."

Property already discounted in foreclosure

Advocates for cramdown legislation have said the financial impact to the industry would be minimal, given that banks steeply discount foreclosed properties when selling them. Rep. John Conyers (D-Mich.), reported that after the bank foreclosed on a constituent named Thomas who'd fallen two months behind on her mortgage, it subsequently sold it to an investor for less than $900.

"The financial services industry insisted it would voluntarily modify mortgages to help homeowners avoid foreclosure," Conyers said. "This has not happened. Ms. Thomas sought to modify her mortgage and, like most in her situation, the loan servicer failed to help her save her home from foreclosure."

The Wednesday hearing came on the heels of a Treasury report released that morning showing that only 12 percent of seriously delinquent homeowners have obtained loan modifications under an administration program designed to encourage lenders to modify loans for at-risk homeowners. The 360,000 loan modifications now underway under the program are equal to the number of foreclosure filings that occurred in just the month of July, according to data from foreclosure data company RealtyTrac.

"Waiting for banks to 'volunteer' to end this foreclosure crisis is a waste of time," said Illinois Sen. Richard Durbin, the Senate's second-ranking Democrat. "Treasury's latest report shows this approach has failed miserably."

Mortgage Bankers warn of destabilizing market

However, David Kittle, chairman of the Mortgage Bankers Association, said such legislation could destabilize the mortgage market just as it's trying to recover.

"Treasury officials today reported that the Obama administration's Home Affordable Modification Program - HAMP - is on target to reach its stated goal of 500,000 trial loan modifications by November 1," Kittle said in a statement. "We ought to let that program, still in its early stages, continue to take hold, rather than rushing to try to pass a measure that will do more harm than good."

The White House has expressed little interest in promoting the legislation, given the lack of support in the Senate. However, Frank said that could change as foreclosures mount and the loan modification efforts continue to struggle.

"Let me put it this way," he said. "The best lobbyists we have for getting bankruptcy legislation passed are the servicers who are not doing a very good job of modifying mortgages. And if they do not improve their performance, then they improve the chances of that legislation."