Barney Frank Eyes Mortgage Cramdown Revival

A controversial piece of bankruptcy legislation may see a revival soon, according to discussion begun this week with House Financial Services Committee chairman Barney Frank, D-Mass., indicating mortgage cramdowns through bankruptcy is an increasingly relevant idea. At a House subcommittee hearing Wednesday, Frank gave vocal support to cramdown legislation, which would allow bankruptcy judges to alter mortgages on primary residences, potentially lowering — or “cramming down” — a portion of the balance. Frank remains “disappointed by the pace of foreclosure mitigation efforts” across major servicers, according to a spokesperson with his office. If the pace of these efforts does not increase, he may soon push the campaign for bankruptcy reform in the broad financial regulatory reform bill moving through the House. At the hearing over the progress of the Making Home Affordable (MHA) Program’s modification and refinance initiative, Frank disputed the notion a bankruptcy cramdown law would make people eager to enter bankruptcy as an alternative to foreclosure. He said “bankruptcy is no picnic” and again pointed toward the sluggish performance of servicers within the MHA modification program six months into its operation. “The best lobbyists we have for getting bankruptcy legislation passed are the servicers who are not doing a very good job of modifying mortgages,” Frank said. “And if they do not improve their performance, then they improve the chances of that legislation.” Opponents of the legislation, including Rep. Spencer Bachus, R-Ala., say cramdowns would not solve the key issues prolonging the foreclosure crisis, like high unemployment that prevent homeowners from affording mortgage payments. “Bankruptcy cram-down [legislation], which was rejected by the Senate earlier this year, would severely undermine recent measures taken to unfreeze credit by private markets and I think would prolong our housing recovery by adding uncertainty to the market and increasing mortgage costs to the vast majority of Americans,” Bachus said in opening remarks at the hearing Wednesday. “[It] would precipitate some of the very things the Administration is attempting to prevent with this legislation.” But Frank said waiting for jobs to return is a “wholly inadequate” approach to reducing the flow of foreclosures. Bankruptcy reform, which would include cramdown legislation, bears little relevance to the availability of credit. “We are talking about a bankruptcy bill that would be limited to mortgages already granted,” Frank said. “The notion that this would somehow stop the flow of credit is hard to maintain. It would have nothing to do with credit going forward.” Second mortgages remain an issue to modifications, as second lien holders are reluctant to agree to modification, and Frank said he hopes to address the problems legally next year. “There are people who say it would be good to modify…or reduce the principal, but no one’s got the authority to do it,” he said. “No one can decide how to arbitrate between first and second mortgages.” Write to Diana Golobay.