Congressional Push for 'Cram-Downs': It's On!

One of the key legislative battles of the new Congress--in the housing arena, at least--is set for liftoff after Democrats in the House and the Senate dropped the controversial legislation.

Sen. Dick Durbin, a democrat from Illinois, introduced a bill earlier this week that would change existing bankruptcy code to allow bankruptcy judges to alter the terms of mortgages on primary residences. The bill, which Durbin calls "a top priority this year," will be fiercely apposed by the mortgage banking industry, which has argued that the change would lead to higher mortgage rates.

Rep. John Conyers, a democrat from Michigan, introduced a companion bill in the House.

From Durbin's press release:

“For nearly two years, we’ve heard dire predictions about the housing crisis and its effects on the economy. Sadly, they have not only come true, but have been far worse than anyone imagined,” Durbin said. “The question that faces us now is this: after committing over one trillion dollars in taxpayer money to address the financial crisis, why don’t we take a step that would indisputably reduce foreclosures and that would cost taxpayers nothing?” Durbin asked…

Recent voluntary efforts to modify mortgages have failed woefully. According to a recently-published study, almost half of these so-called foreclosure prevention efforts actually increased the monthly payments of homeowners. “How does that help families save their homes?” Durbin asked.

Durbin’s bill costs taxpayers nothing and would help families save their homes by:

• Eliminating a provision of the bankruptcy law that prohibits modifications to mortgage loans on a debtor’s principal residence, so that primary mortgages are treated the same as vacation homes and family farms.

• Extending the time frame debtors are allowed for repayment, in order to reduce monthly payments to make the mortgage more affordable.

• Permitting bankruptcy judges to replace escalating variable interest rates with a new interest rate that will keep the mortgage affordable over the long term while also compensating creditors appropriately for risk.

• Waiving the bankruptcy counseling requirement for families for whom foreclosure will soon commence, so that precious time is not lost as families fight to save their homes.

• Ensuring lenders provide proper notice when assessing fees and allow judges to waive prepayment penalties.

• Maintaining debtors’ legal claims against predatory lenders while in bankruptcy.

The Home Front will be keeping a close eye on this, stay tuned.