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Durbin Gives Bailed Out Banks ‘Cramdown’ Ultimatum


Sen. Richard Durbin (D-Ill.) (WDCpix)

A top Democrat on Monday warned the nation’s banks that, unless they get more aggressive in modifying mortgages to prevent foreclosure, Congress will renew previous efforts to empower families to keep their homes through bankruptcy. But Sen. Richard Durbin (Ill.), the upper-chamber’s second ranking Democrat, also gave the banks three months to comply with his ultimatum — a span over which roughly 1 million new homeowners are projected to enter foreclosure.

Congress and White House officials have created a series of programs designed to entice mortgage lenders and servicers to modify troubled loans voluntarily, but those efforts haven’t kept pace with an ever-rising number of foreclosures, which have already topped 1.5 million since January. The issue has plagued lawmakers, who have spent hundreds of billions of dollars propping up the nation’s banks, but have provided little in direct help for families caught in the swirl of the housing crisis, which was at the root of the current recession.


Illustration by: Matt Mahurin

Durbin is the sponsor of legislation to alter the bankruptcy code to allow judges to trim, or “cramdown,” the terms of primary mortgages to keep people in their homes — an option current law doesn’t permit. The Senate killed the proposal earlier in the year, but it could resurface if foreclosures continue to rise and the banks continue their reluctance to cut mortgage rates on their own. Durbin, for his part, thinks the bankruptcy change can’t come soon enough.

“The voluntary efforts by some banks to slow the foreclosure crisis and stabilize America’s housing market have not worked,” Durbin said during a housing forum at the Center for American Progress Action Fund. “Whether the bankers and mortgage servicers are failing because of intransigence or incompetence doesn’t matter … They have to do much better.”

At the center of the Obama administration’s efforts is the Home Affordable Modification Program, which allocates $75 billion to encourage banks to make mortgage loans more affordable. White House officials estimate the initiative will prevent between 3 million and 4 million foreclosures in the next few years. Yet only 200,000 modifications have been accepted under the program, according to the Treasury Department, and most of those are temporary, three-month trial arrangements.

Last Tuesday, the Obama administration called executives from the nation’s top servicers to the White House, urging them to commit to a goal of 500,000 modifications by the start of November. If the banks haven’t made “real progress” toward that target, Durbin warned Monday, he’ll begin whipping support for “further legislative solutions,” including the controversial proposal to reform the bankruptcy code, and another to require third-party arbitration between borrowers and lenders.

“I want to put the banks and mortgage servicers on notice today,” said Durbin, who sent letters Monday to each of the 34 banks that have already signed on to participate in the administration’s modification program.

The comments arrive just days after another powerful Democrat, House Financial Services Committee Chairman Barney Frank (D-Mass.), issued a similar threat to revisit cramdown. The statements are evidence of a growing impatience among some lawmakers with the banking industry’s efforts to stabilize the still-volatile housing market.

Credit Suisse has estimated that Durbin’s bill would prevent roughly 20 percent of all foreclosures — not because one-fifth of struggling homeowners would pursue loan modifications in bankruptcy court, but because the very threat of bankruptcy would prod banks to volunteer the more affordable modification terms required to keep families in their homes.

“If that is at the end of the road as a possibility,” Durbin said, “I think it’s an incentive for action.”

Standing in his way have been the powerful finance industry and its many supporters on Capitol Hill, who argue that mortgage contracts are sanctuaries not to be meddled with. Empower judges to alter mortgages, they say, and the increased risk to the banks will be passed along to all borrowers in the form of higher rates.

Another barrier to bankruptcy reform has been the Obama administration, which abandoned its previously enthusiastic support for cramdown earlier this year. Although the House passed its version of the bill in March, the absence of White House backing led to the Senate defeat of Durbin’s cramdown bill in April. More recently, White House officials told Congress that they have all the tools they need to tackle the foreclosure problem.

Durbin on Monday said he hasn’t been in direct touch with Obama about the issue, but has been in contact with others at the White House, including Treasury Secretary Timothy Geithner.

Meanwhile, nationwide foreclosures are on pace to top 3 million this year, up from 2.3 million in 2008, according to RealtyTrac, an online foreclosure database. In June alone, foreclosures topped 336,000, up roughly 15,000 from May, RealtyTrac found. At that rate, the number of new foreclosures surfacing by Durbin’s November ultimatum will approach 1 million. Or more. Fueled by rising unemployment trends and another wave of looming mortgage resets — this one revolving around the so-called option adjustable rate mortgages — experts warn that the numbers will only get worse.

“It’s a problem that’s not going to get any better anytime soon,” Martin J. Gruenberg, vice chairman of the Federal Deposit Insurance Corporation, said during Monday’s housing forum.

Much of the problem revolves around the complex web of disconnected interests associated with mortgage finance. Lenders and investors, for example, have different motivations than borrowers, who have different motivations than the servicers who purchase the rights to manage the loans.

David Wecker, an investor with Illinois-based Magnetar Capital, said Monday that the “misalignment” between those interests has led servicers to pursue foreclosures even when they harmed both investors and homeowners. Wecker encouraged a bolder system of enticing loan modifications. The instability that results from frequent foreclosures, he argued, is “not good for any market participant.”

Policymakers will soon have a new tool at their disposal: On Tuesday, the Treasury is set to release servicer-specific modification data — information that should lend a better picture of whether the reluctance to modify loans is a problem isolated to just a few companies, or whether the problem stems from some more fundamental flaw in its design.

Durbin, meanwhile, says he’s not trying to rescue every borrower in the country, but simply to stabilize the housing market that’s been the cause of the recession.

“I’m a realist,” said the Illinois Democrat. “I know we can’t save every soul. But it’s going to take more than the power of prayer to take us through this crisis.”

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