House Faces Tuesday Vote on Bankruptcy Cramdowns

The House of Representatives will on Tuesday consider a sweeping homeowner assistance legislative package that would allow bankruptcy judges to modify mortgage debt on a borrower’s principal residence. The bill, HR 1106, or the Helping Families Save Their Homes Act, contains the controversial “cramdown” measure originally passed by the House Judiciary Committee in early January. The bill had potentially been slated for possible vote today, but various media reports as well as sources that spoke with HousingWire have suggested that negotiations over the hot-button issue are yet continuing. Read the full legislation. “To allow time for more discussion, I expect to complete consideration and vote on the bill likely Tuesday of next week,” House majority leader Steny Hoyer (D-MD) told MarketWatch Thursday. Some of those discussions include linking any bankruptcy cramdowns to the Obama administration’s newly-announced mortgage modification plan, as well as potentially limiting cramdown authority (at least initially) to subprime mortgages only. Marketwatch reported Thursday afternoon that a group of 67 centrist House Democrats are pushing for an explicit loan modification-cramdown link, meaning that no mortgage could see its principal balance reduced by a bankruptcy judge unless the borrower had first sought out relief under the terms of the administration’s loan modification guidelines. See earlier coverage of the Homeowner Affordability and Stability Plan. Senator Richard Durbin (D-IL), the lead sponsor of the cramdown legislation, suggested to American Banker on Tuesday that Democrats might be willing to limit cramdown authority to just subprime mortgages, in an effort to quell industry unrest and long-standing opposition to the proposal. Subprime loans are not available for modification under the administration’s HASP. “We’ve talked about that as a possibility,” he told the news service. “I am willing to negotiate. I want this to be a reasonable approach, but we have to include [bankruptcy]. If we don’t include it, we’ll be stuck in the same mess we’re in today.” HR 1106 also includes so-called safe-harbor legislation for servicers, designed to protect servicers from legal liability in the event of massive-scale mortgage modifications. Investors have already begun litigation over bulk loan modifications in some cases; HousingWire broke the story late last year of a case involving Countrywide and Bank of America (BAC). Investors sued the mortgage giant over a multi-state predatory-lending settlement that will see Countrywide modify as many as 400,000 loans, reducing payments due on mortgages it services by as much as $8.4 billion. Critics have suggested the so-called safe-harbor legislation undermines the sanctity of contract terms, an issue that goes well beyond mortgage markets but would also serve to make mortgages more costly as investors factor in the reality that contractual terms may prove an ineffectual source of limiting their risk. Others have suggested that the contractual terms commonly binding servicers’ activity in loan modifications are often so vague that it’s not clear what the servicer’s obligation really is beyond maximizing net present value. The Mortgage Bankers Association this week sent a letter to U.S. Department of Housing and Urban Development secretary Shaun Donovan and Treasury chief Tim Geithner that reiterated long-standing industry opposition to cramdown legislation, advocating principal deferment instead. An upcoming feature in the March issue of HousingWire Magazine explores just how far reaching the consequences of mortgage cramdowns may really be, beyond their effect on the primary market and an expected surge in bankruptcy filings by borrowers. There are complex issues involving how losses from a cramdown in bankruptcy would cascade through to investors in ABS/MBS, as well as issues involving a servicer’s ability to recoup advances — these are issues that lawmakers on Capitol Hill have clearly not considered fully in crafting legislation focused intently on the front-end of the modification process. To subscribe, click here. Write to Paul Jackson at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.