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Dems Limit Scope of ‘Cramdown’ Bill

Bowing to the banking industry, House Democrats yesterday weakened legislation empowering bankruptcy judges to alter the terms of primary mortgages to prevent foreclosures. The changes — which came during a meeting of the House Judiciary Committee, headed by Rep. John Conyers (D-Mich.) — would prevent future homeowners from going the bankruptcy route.

From the Wall Street Journal:

In key concessions to the banking industry, Mr. 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. 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 financial blog Calculated Risk cites a passage from the late-contributor Tanta to argue that limiting the bankruptcy avenue to existing loans might mitigate the law’s effectiveness: From Tanta’s post:

I’m in favor of it [cramdown] because I think it will be part of a range of regulatory and legal changes that will help prevent future borrowers from getting into a lot of jams, which is to say that it will … actually help “stabilize” the residential mortgage market in the long term. Any industry that wants special treatment under the law because of the socially vital nature of its services needs to offer socially viable services, and since the industry has displayed no ability or willingness to quit partying on its own, then treat it like any other partier under BK law.

Even after taking hundreds of billions of taxpayer dollars, it seems the banks still hold considerable sway over Congress.

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