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Top Dems Renew Call for Cramdown

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Durbin072506.jpg

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

The White House program designed to prevent foreclosures by paying banks to alter loans voluntarily isn’t doing nearly enough to keep struggling borrowers in their homes, several powerful Democrats charged Wednesday. Rep. Barney Frank (D-Mass.), who chairs the House Financial Services Committee, and Richard Durbin (Ill.), the Senate’s No. 2 Democrat, are threatening to renew the push to empower homeowners to escape foreclosure through bankruptcy — a proposal that’s anathema to the banks and their congressional defenders.

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Congress.jpg

Illustration by: Matt Mahurin

In March, the Obama administration launched a program providing $75 billion in carrots to banks that make mortgages more affordable. While administration officials say the program is right on track, the number of modifications lags far behind new foreclosure filings. Indeed, the Treasury Department released figures Wednesday revealing that the voluntary initiative has encouraged roughly 360,000 trial modifications since the program began. Meanwhile, foreclosure filings topped 360,000 in July alone, according to RealtyTrac, an online foreclosure tracker. The figures, many lawmakers and consumer groups contend, are indication that leaving the modifications to the fancy of the banks won’t stem the foreclosure crisis, which was at the root of the past year’s financial meltdown and threatens to prolong it.

“Waiting for banks to ‘volunteer’ to end this foreclosure crisis is a waste of time,” Durbin said in a statement Wednesday. “Treasury’s latest report show[s] this approach has failed miserably.”

Durbin is calling on Treasury Secretary Tim Geithner “to sit down with congressional leadership and work to end this blight on our economic future.”

The comments come at a time when foreclosures continue to skyrocket, even as some other indicators suggest that the economy is on a slow rebound. Indeed, July’s 360,149 foreclosure filings represent a 7 percent jump from the month before, RealtyTrac reported. And the trend is expected to worsen as the leading cause of foreclosures shifts further from the risky subprime loans that collapsed so spectacularly in recent years to today’s rising unemployment, which is approaching 10 percent. Even the most affordable modifications, experts point out, will likely be unaffordable to folks without incomes.

“A payment of zero will never be attractive to a lender,” Paul Willen, senior economist at Boston’s Federal Reserve, said Wednesday during a hearing of the Financial Services housing subcommittee.

Michael Barr, the Treasury Department’s assistant secretary for financial institutions, told lawmakers that the administration’s anti-foreclosure program — designed to modify between 3 million and 4 million mortgage loans over the next several years — is on pace to meet that goal. The 45 servicers who are participating, Barr testified, have offered 570,000 trial modifications, with 360,000 of those underway. Under the trial system, if homeowners meet their payment obligations for three straight months, then the new mortgage terms become permanent.

Still, Barr conceded that there’s plenty of room for more bank cooperation. “We think that all the servicers can do more than they’re doing now,” he said.

Administration officials, who called representatives of the major servicers to Washington in July to urge them to do more to help struggling borrowers stay in their homes, have planned a similar meeting for Thursday.

Frank said Wednesday that he’s “disappointed at the pace” of the White House initiative. Considering the reluctance of mortgage servicers to modify loans voluntarily, he added, mortgage bankruptcy reform “has become relevant.”

“The best lobbyists we have for getting bankruptcy legislation passed are the servicers who are not doing a very good job of getting mortgages modified,” Frank said.

Under the Democrats’ reform 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 currently have over loans for vacation homes, boats and other material assets, but not over primary mortgages.

Consumer advocates say such reform would provide an important stick nudging the banks in the direction of modifications rather than foreclosures. Alys Cohen, attorney with the National Consumer Law Center, an advocacy group, told lawmakers Wednesday that servicers, aiming to maximize their profits, have been all too quick to choose the latter.

“As with all businesses,” Cohen said, “servicers add more to their bottom line to the extent that they can cut costs.”

Willen, of the Boston Fed, pointed out another reason that carrots alone won’t ensure the success of Washington’s anti-foreclosure strategy: There’s nothing, he said, preventing the banks from choosing to modify only those loans that are likely safest to begin with. “A program that offers monetary incentives to do as many modifications as possible and to minimize the probability that modified loans redefault may not in fact prevent many foreclosures,” Willen said.

Frank spokesman Steven Adamske said that, if the servicers don’t make “significant progress” on loan modifications in the coming months, the Financial Services chairman will add the cramdown provision to a larger package of finance reforms that House Democrats plan to take up later in the year.

They have a tough road. Although House lawmakers already passed mortgage bankruptcy reform legislation this year, the proposal hit a wall of bipartisan opposition in the Senate, after the Obama White House abandoned its previous support for the proposal. On top of that, the finance industry, despite its remarkable collapse, remains a powerhouse of influence on Capitol Hill, giving hundreds of millions of dollars to lawmakers each election cycle.

And Republicans, who have sided with the banks in opposing mortgage bankruptcy reform, didn’t stray from that position this week. Rep. Spencer Bachus (Ala.), senior Republican on the Financial Services panel, said the only way to reverse the rising tide of foreclosures is to curb the rising rate of unemployment. The best way to tackle unemployment, Bachus added, is to get the government out of the way and “allow the private sector to create these jobs.”

“That’s how you save these homes,” Bachus said.

Mortgage servicers, for their part, maintain that they’ve bent over backward to comply with the administration’s loan modification program in order to help homeowners. Jack Schakett, executive in charge of credit loss at Bank of America, the country’s largest mortgage servicer, told lawmakers Wednesday that BoA intends to transition 125,000 trouble loans into the trial modification phase before Nov. 1.

“Threat of bankruptcy,” Schakett said, “would not change our policies of modification.”

Yet such responses, many lawmakers say, are just further indication that, if Congress hopes to rein in foreclosures, mortgage modification decisions shouldn’t be left solely in the hands of the banks. “The servicers are not going to change,” Rep. Al Green (D-Texas) said during Wednesday’s hearing. “So if we know that [they aren't going to change], then we have to do something different.”

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