rssBand of Senate Dems Pressures Obama on Cramdown
Thursday, July 23, 2009 at 3:00 pm
- 29 Comments
Sen. Richard Durbin (D-Ill.) (WDCpix)
Roughly three months after Senate lawmakers killed legislation empowering homeowners to escape foreclosure through bankruptcy, some upper-chamber Democrats are looking to revive the corpse. They hope to pressure the White House into spending valuable political capital on a cause fallen by the wayside.
Up to now, policymakers have relied on programs that subsidize lenders and mortgage servicers who volunteer to alter loans to keep homeowners afloat. Yet those voluntary modifications lag far behind the rising tide of foreclosures. Indeed, only 160,000 homes have been propped up this year under the largest such program — a figure dwarfed by the more than 1.5 million foreclosure filings since January. With unemployment on the rise, the gap is only projected to expand. The dark trends have slowly prodded lawmakers to return to mortgage bankruptcy reform as the possible missing link to addressing the foreclosure crisis — the stick to accompany the financial carrots that have thus far failed to stabilize the housing market.
Illustration by: Matt Mahurin
“After two years of efforts that rely on banks to volunteer to rework mortgages, it is time to admit that the programs that have been put in place thus far to ease the crisis are clearly not working,” Sen. Richard Durbin (D-Ill.), sponsor of the Senate’s bankruptcy reform bill, said Thursday during a foreclosure hearing in the Senate Judiciary Subcommittee on Administrative Oversight and the Courts. “With a simple change to the bankruptcy code … over 1.8 million families could save their homes in this country between now and the end of 2012, if the Senate could only muster the courage to help them.”
Under Durbin’s proposal, bankruptcy judges could reduce, or “cramdown,” the terms of mortgages, including interest rates and principal balances, to make the loans more affordable for struggling homeowners — a power judges have over loans for vacation homes, jewelry and other material assets, but not over primary mortgages.
Yet Durbin represents a somewhat lonely crowd. Not only is the bankruptcy-reform proposal anathema to Republicans, but the Obama administration, once a cheerleader for the change, has abandoned the legislation altogether. Without the active backing of the White House, a cramdown bill that passed the House in March was shot down in the Senate less than two months later. Still, Durbin has vowed to bring it back to the Senate floor this year. But, faced with a crowded legislative calendar, including sweeping health care and climate change reform, he’s running out of opportunities.
That erosion of White House backing, according to housing and consumer advocates, spells bad news for the nation’s homeowners, who are drowning in debt in larger and larger numbers. Indeed, more than 1.5 million homes have filed for foreclosure this year, according to RealtyTrac, an online foreclosure database. The figure represents a 15 percent jump from 2008. And the numbers are rising. In May, roughly 321,000 foreclosures were filed nationwide, RealtyTrac found. In June, the figure was more than 336,000.
The difficulty in addressing the housing crisis can be attributed largely to the shifting causes of mortgage defaults. What began as a problem limited largely to homeowners with risky, variable-rate, low-equity loans, has evolved to plague even those borrowers who took out more stable, fixed-rate mortgages with significant down payments. Rising unemployment has only exacerbated the trouble.
To tackle the crisis, the Obama administration in February rolled out its Making Home Affordable Program, which supplied $75 billion to entice servicers to tamp down mortgage payments to 31 percent of monthly income for homeowners struggling to stay afloat. The White House said at the time that the program would help between 3 million and 4 million families stay in their homes.
Yet, last week, White House officials told a Senate panel that just 325,000 modifications have yet been offered under the program. Of those offers, 160,000 are in a three-month trial modification stage — modifications that will become permanant if the homeowners can meet the new payment terms over that span.
Not only are those number insufficient to address the rising tide of foreclosures, Adam Levitin, housing expert at the Georgetown University Law Center, told lawmakers Thursday, but of the mortgage modifications that are being made, almost none involve reducing the principal balance of the loan. With the housing market falling — precipitously in some regions — even homeowners who can afford to pay their mortgages will begin to walk away if they aren’t building equity, Levitin warned.
“None of the current loan modification or refinancing efforts attempt to deal with the negative equity problem in a way that offers a long-term solution,” Levitin said.
There remains some disagreement among finance experts over why lenders and servicers have been so reluctant to modify loans, even when foreclosures are often the more expensive option. One theory posits that the servicers will be paid more from foreclosures, even if the owners of the loans will lose out.
“As long as servicers profit because homeowners are in default, they’re not going to volunteer to take a hit,” Alys Cohen, an attorney with the National Consumer Law Center, testified Thursday.
But that confusion, according to cramdown supporters, is just another reason to pass the bill. “Whatever the factors may be that are inhibiting voluntary and government-subsidized loan modifications, they are immaterial if a mortgage loan can be modified in bankruptcy,” said Levitin.
Standing in the way of the legislation are not only the banks but the banks’ supporters on Capitol Hill. Conservatives argue that empowering judges to modify mortgages would make banks more reluctant to lend money, thus exacerbating the credit freeze.
Encapsulating the GOP argument, Sen. Jeff Sessions (Ala.), senior Republican on the Judiciary subpanel, warned Thursday that the cramdown bill would raise rates on everyone. A contract’s a contract, Sessions said, and homeowners who agreed to the terms of a mortgage loan should be held accountable for the payments. “There’s no free lunch here,” he said.
Not that Washington policymakers are unaware that the voluntary efforts aren’t working as planned. The Obama administration this month has already sent letters to servicers urging increased participation in the voluntary modification program.
In another concessionary move, the Treasury this month expanded a program allowing homeowners with mortgages backed by Freddie or Fannie to refinance those loans if the outstanding balance doesn’t exceed 125 percent of the home’s appraised value. Originally, the value cap for such refinancings was set at 105 percent. The change was made in recognition of the increasing number of homeowners who are underwater as home values have plummetted. Indeed, Levitin estimates that 30 percent of all families who bought homes in the last five years currently owe more than their homes are worth.
Lawmakers and advocates alike are warning that, unless Congress steps in to address the housing crisis — which, after all, was the root of the economic downturn — the result will be a spiral of foreclosures leading to more foreclosures, and a prolonging of the larger recession.
“If we fail to act,” said Sen. Sheldon Whitehouse (D-R.I.), chairman of the courts subpanel, “I fear that we put ourselves at risk: that a vicious cycle of foreclosures, falling home values, and declining tax revenues will keep us in recession for years to come.”
29 Comments
Pingback posted July 23, 2009 @ 4:02 pm
[...] Band of Senate Dems Pressure Obama on Cramdown – The Washington Independent.comRoughly three months after Senate lawmakers killed legislation empowering homeowners to escape foreclosure through bankruptcy, some upper-chamber Democrats are looking to revive the corpse. They hope to pressure the White House into spending valuable [...]
Pingback posted July 23, 2009 @ 4:25 pm
[...] News Sources wrote an interesting post today onHere’s a quick excerptSen. Richard Durbin (D-Ill.) (WDCpix) Roughly three months after Senate lawmakers killed legislation empowering homeowners to escape foreclosure through bankruptcy, some upper-chamber Democrats are looking to revive the corpse. They hope to pressure the White House into spending valuable political capital on a cause fallen by the wayside. Up to now, policymakers have relied on programs that subsidize lenders and mortgage servicers who volunteer to alter loans to keep homeowners afloat. Ye [...]
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Pingback posted July 23, 2009 @ 5:26 pm
[...] Read more from the Washington Post April 29, 2009 — Mortgage Cram-Downs Stripped Out of Rescue BillApril 30, 2009 — Bankruptcy Judge Loan Modification Plan Hits Wall in Senate [...]
Pingback posted July 23, 2009 @ 5:36 pm
[...] News Sources wrote an interesting post today onHere’s a quick excerptSen. Richard Durbin (D-Ill.) (WDCpix) Roughly three months after Senate lawmakers killed legislation empowering homeowners to escape foreclosure through bankruptcy, some upper-chamber Democrats are looking to revive the corpse. They hope to pressure the White House into spending valuable political capital on a cause fallen by the wayside. Up to now, policymakers have relied on programs that subsidize lenders and mortgage servicers who volunteer to alter loans to keep homeowners afloat. Ye [...]
Pingback posted July 23, 2009 @ 6:12 pm
[...] News Sources, Richard Durbin, Senate Dems, Senate Lawmakers, Three Months, Wayside, White House News Sources wrote an interesting post today onHere’s a quick excerptSen. Richard Durbin (D-Ill.) (WDCpix) [...]
Pingback posted July 23, 2009 @ 6:18 pm
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Comment posted July 24, 2009 @ 12:43 am
How many people have to be upside-down on their mortgages (if not actually bankrupt) before Congress and the administration admit that it's a major part of the economic mess?
Comment posted July 24, 2009 @ 3:04 am
Sen. Jess Sessions needs an education. Reducing the mortgage crisis to “There's no free lunch here” is childish banter. The contracts signed by homeowners are not the issue either. We, the people of this nation are drowning. Our financial crisis is not based upon simple renigging of our contracts. We are unable to meet the terms of our contracts due to economic conditions caused by elements well beyond our control. Session's insensitivity pen points the problem with the GOP. They assume, as usual, that we simple want a free hand out. The reality of our plight exist because the GOP allowed their supporter to manipulate financial markets for their own gain. The impact of that unethical behavior has not dropped us into a recession beyond anything we the people can control. Session's needs to check his averice againt reality and start making policy the relieves the burden thrust upon the american people. WE did not create this problem but apparently we are suppose to take responsibility for it. Sessions, like most GOP members, live by a double standard. They requires us to clean up their mess while they point their chubby fingers at our inability to survive an unprecidented economic collapse.
Pingback posted July 24, 2009 @ 12:33 pm
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Comment posted July 24, 2009 @ 9:54 pm
I find Mr. Lillis's views to be refreshing and enlighting even though he seems to weave his bias of this administration into a positive light all the while silently casting subtle innuendo's of destain for certain elected officials.
Comment posted July 28, 2009 @ 9:06 am
Doesn't everyone see… we must pass this bill this fall… we simply must. If we fail to do so, we are certain to see the recession deepen into depression. We could have stopped this slide two years ago for a fraction of what it will cost us today… and it will cost that much more tomorrow.
And for anyone not losing their home… today. I can only remind you of tomorrow. Bankruptcy reform is the only threat that will bring the banks to the table to modify mortgages. The judges won't see many loans to modify, because the banks will fix all those “problems” and in a hurry.
Don't be fooled… write your senator and demand bankruptcy reform.
Comment posted July 29, 2009 @ 4:41 pm
I am trying everyday to help homeowners save their homes and wade thru the muck of the Obama plan, Making Home Affordable. When some of the homeowners call in to the lenders they are given the run around. Fax tax returns, current paystubs, a hardship letter and a signed 4506T. All paperwork is faxed with account numbers on every page. They call back in 72 hours, nothing in the system, they call back in a week still nothing has been received. The homeowners are getting so frustrated. I believe that if the “Cramdown Bill” was implemented with certain restrictions like effective dates, loans written between Jan 03 and Dec 31, 08, then the lenders would be forced to either modify themselves or let the BK trustee do it for them. The properties would not be lost thru foreclosure so the values in neighborhoods would have a better opportunity to stabilize. When people say that the homeowners that are loosing their homes should never have been able to get homes in the first place, they are not seeing that the loans that are now starting thru the foreclosure process are homeowners that purchased with money down but have now lost jobs or have been cut back. Also, don't forget, so many people have already lost their homes that the amount that would qualify under the Cram Down bill will now be alot less.
Comment posted July 30, 2009 @ 9:15 pm
Guild Mortgage in San Diego, CA simply states that they “do not modify any mortgages” because “they don't have to” and they refuse to help us keep our home in any way. The original servicer, New Century, went bankrupt and never finished the FHA PMI paperwork so we have been paying PMI for 30 months while having no mortgage insurance at all. Guild does not mind losing $300,000 even when they could rewrite the loan for closer to market value.
The cramdown bill is the ONLY way to keep our home. The bankers own the senate anyway so there appears to be no help coming.
Property values have declined by 50% in one year and are still falling. Homes that were listed at $369,000 are now selling for $149,000 and less-much more affordable for the lucky few who waited.
Comment posted July 31, 2009 @ 7:10 pm
I could not have said it better myself. The banks and congress must understand that the American people are watching the actions they do and say very closely at this time. I feel that change is in the air and that people will not allow the insane tactics of greedy deals to continue. Yes, it may take sometime for change to happen, but it is going to. The more we inform people of their rights and powers to change shady ideals, the more we as a nation come together.
Comment posted August 2, 2009 @ 5:24 pm
I just spent 4 months “negotiating” with WAMU/Chase to modify my “upside down” mortgage, only to find on the date when my “modification plan” was to be delivered that I received a “notice of default” instead. Apparently and quite conveniently, they now have “no records” of any of our modification negotiations. It is apparent that they had no real interest in modifying our mortgage and have “lost” our paperwork in the inter-office shuffle between Florida, New York, and India. We will now have no other choice but to file bankruptcy in response to their actions. Perhaps the bankruptcy will cause them to mysteriously “find” our files and present a suitable modification? Perhaps not. Without the motivation provided by a powerful bankruptcy court, it seems improbable that the banks will treat homeowners in a respectable or equitable manner. It is in the banks interest to flood the bankruptcy courts and defer any true modification negotiation. Without the tools to force the banks to share the cost of this recession, I am afraid we will continue to see a continued “cram down” as the banks force bankruptcy on many more millions of Americans and flood the courts. We must empower our courts now in order to avoid further predatory banking practices while providing the banks with a suitable motivation to truly assist homeowners.
Pingback posted August 23, 2009 @ 1:05 am
[...] See more here: LEGISLATIVE: Band of Senate Dems Pressures Obama on Cramdown [...]
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Comment posted September 11, 2009 @ 9:10 pm
OMG! That is my experience with Guild Mortgage too. The flat out told my HUD counselor that “that their attorneys told them that they don't have to participate in Obama's plan.” I have been working with Fannie Mae and was just told today by Fannie Mae that they ARE going to participate, they have just had a hard time getting their procedures in line. I hope it's not too late for you, but I strongly suggest that you contact Fannie Mae or Freddie Mac directly and work with their people to get Guild Mortgage to help us out!
Comment posted July 3, 2010 @ 3:29 am
And for anyone not losing their home… today. I can only remind you of tomorrow. Bankruptcy reform is the only threat that will bring the banks to the table to modify mortgages. The judges won't see many loans to modify, because the banks will fix all those “problems” and in a hurry.
Comment posted July 25, 2010 @ 8:08 am
OMG! That is my experience with Guild Mortgage too. The flat out told my HUD counselor that “that their attorneys told them that they don't have to participate in Obama's plan.” I have been working with Fannie Mae and was just told today by Fannie Mae that they ARE going to participate, they have just had a hard time getting their procedures in line. I hope it's not too late for you, but I strongly suggest that you contact Fannie Mae or Freddie Mac directly and work with their people to get Guild Mortgage to help us out!
Comment posted July 30, 2010 @ 2:44 pm
He was furious and told them he didn't want to go into default!
Comment posted August 4, 2010 @ 5:25 am
economic in US is a mess! there are a lot more things our gov't have to do to make economic better!!!
Comment posted October 14, 2010 @ 11:08 pm
have you had any success with Guild?? I'm applying for a loan modification with them and don't know what to expect. They told me that they do not allow loan modifications during a pending bankruptcy, so I'm going to have to hold off on my bankruptcy.
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