Band of House Dems Revisits Cramdown
Friday, July 10, 2009 at 4:06 pm
The Obama administration has all but abandoned it, and the Senate has already voted it down. But a proposal to allow struggling homeowners to escape foreclosure through bankruptcy got a boost Thursday from a small band of House Democrats convinced that voluntary mortgage modifications aren’t alone solving the housing crisis.
They have a point. Despite White House efforts to entice mortgage lenders and servicers to alter the terms of mortgage loans at their own discretion, participation in the program has been meager. As a result, hundreds-of-thousands of homeowners continue to face foreclosure months after the program took effect. That instability in the housing market has, in turn, stifled federal efforts to heal the banks and get them lending prolifically again. In the eyes of some Democratic lawmakers, the combination of trends is evidence enough that Congress needs to return to its bankruptcy proposal to save the homes that the voluntary strategy is not.
“We need to be prepared to act more aggressively to help distressed homeowners,” Rep. Steve Cohen (D-Tenn.), chairman of the House Judiciary Subcommittee on Commercial and Administrative Law, said during a hearing on the topic Thursday. “Evidence suggests that encouraging voluntary modifications alone is, at best, minimally effective in helping financially struggling borrowers stay in their homes. We can and should be prepared to do more.”
On one level, that’s a strange sentiment coming from House Democrats, who already have done more. Indeed, the lower-chamber in March passed legislation empowering bankruptcy judges to reduce, or “cramdown,” mortgage rates and principal balances in order to prevent foreclosures — an avenue available to consumers to save vacation homes, boats and practically any other material asset, but not primary homes.
Yet there’s also no mystery why House Democrats decided to highlight the issue once more: No one else is doing it.
Indeed, while observers on both sides of the debate deemed Senate passage a sure thing, something strange happened last spring. The Obama administration — which had endorsed cramdown in February, arguing that it would provide a vital stick to accompany the financial carrots it was offering lenders — grew silent on the issue. Without a push from the White House — and with enormous opposition coming from the finance industry — the Senate in April killed the proposal, with 12 Democrats voting against the measure.
And the administration’s neutrality on the topic seems to be continuing. Although the Treasury Department was invited to testify at Thursday’s hearing, it declined to send a representative — an episode that Rep. Zoe Lofgren (D-Calif.) deemed “shameful.”
Asked to explain the absence, Treasury spokeswoman Meg Reilly declined. Reilly also declined to weigh in on the Treasury’s current position on cramdown in general.
Not that the White House isn’t aware that it’s current foreclosure-mitigation efforts are coming up short. A few hours after the House hearing, Treasury Secretary Tim Geithner and Housing and Urban Development Secretary Shaun Donovan distributed letters to mortgage servicers urging greater participation in the voluntary modification program.
“Much more progress is needed,” the officials wrote. “We believe there is a general need for servicers to devote substantially more resources to this program for it to fully succeed and achieve the objectives we all share.”
There have been other signals that further efforts are needed to contain the housing crisis. Last week, the administration expanded eligibility for homeowners to refinance troubled mortgages, opening the program to those who owe as much as 125 percent of their home’s value. Previously, eligibility was limited to homeowners underwater only up to 105 percent. The change was acknowledgment that home values in some areas have fallen so precipitously that many homeowners were finding themselves ineligible to refinance under the lower ceiling.
On Capitol Hill, there remains some hope that lawmakers will return to the issue this year. After the Senate voted down the measure in April, cramdown sponsor Sen. Richard Durbin (D-Ill.) vowed to use every opportunity to bring the proposal up again. Durbin’s office said this week that that commitment stands. But with the Senate facing a tough legislative schedule in the months ahead — including plans to overhaul the health care system and tackle climate change — chamber leaders are quickly running out of chances to take up additional measures sure to attract such controversy.
That’s bad news for the nation’s homeowners, who continue to struggle at historic rates. Indeed, more than 321,000 homeowners filed foreclosure paperwork in May, up 18 percent from a year ago, according to RealtyTrac, an online foreclosure database. That one-month tally is more than the 270,000 loan modifications that have been offered in the four months since the Obama plan launched. And with overall unemployment numbers continuing to grow, those foreclosure numbers are expected to rise.
“We are not even at the peak of the crisis,” Alan White, a housing expert at the Valparaiso University School of Law, warned lawmakers Thursday.
In every way, Thursday’s debate rehashed the ideological arguments that swirled around cramdown earlier in the year. Democrats, siding with struggling homeowners, blamed the lenders for doing too little to alter the terms of mortgages to prevent foreclosures. While Republicans, rallying for the banks, argued that homeowners should buck up and accept responsibility for signing on the dotted line.
Rep. Trent Franks (Ariz.), senior Republican on the Judiciary subpanel, said he was “troubled,” “puzzled” and “disturbed” by the Democrats’ attempts to revive the cramdown proposal, which he said “died a deserved death in the Senate.”
“No one mandated borrowers to enter into mortgage contracts,” Franks said. “Is no one to be held accountable in America anymore for entering into a contract?”
Yet cramdown supporters countered that the stabilization of the housing market is not important merely for the benefit of struggling homeowners, but for their neighbors — whose homes lose value with each nearby foreclosure — and for the health of the larger economy as well. Relying on the mortgage industry to volunteer the changes, they argue, is recipe for slower recovery.
“Unless homeowners have leverage to force a favorable result,” said Irwin Trauss, an attorney with Philadelphia Legal Assistance, “lenders will continue to avoid the meaningful modifications that are necessary to keep folks in their homes.”
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