Senate Crams Cramdowns

The Senate rejected an attempt by Sen. Richard Durbin (D-IL), to allow bankruptcy judges to modify mortgage terms and possibly lower (or cramdown) a portion of the principal balance on outstanding property loans. The rejected legislation, if passed, allows judges to play the part of bankruptcy arbitrator when determining the market value of a property potentially facing foreclosure. Opponents argued that such legislation would essentially outsource a vital part of bankruptcy legislation: the determination of primary asset value. The issue is an especially hot topic considering declining property values across the nation, where valuations are an uncertain science. As HousingWire coverage reported, the passage of the bill seem long doomed to failure. The bill included provisions to modify loan payments down to 31% of a borrower’s income, regardless of the original stipulations of the mortgage agreement, and held the support of the Obama administration. The cramdown failed on a vote of 51-45. Opponents of the bill are against allowing bankruptcy judges to arbitrarily rewrite the terms of a mortgage contract — including allowing them to cramdown the amount owed, change interest rates, or stretch out the terms of the loan. They say such a move would bring additional risk and uncertainty to an already volatile mortgage market and would make home loans more expensive and less available for consumers, according to the American Bankers Association. There are also questions if the judiciary may be greatly swayed by a suffering homeowner, at the bequest of his or her representing council, to take pity on strained personal finances, without considering the economic ramifications to already struggling bank balances, legal sources against the measure told HousingWire. The AARP, a nonprofit that works to enrich the lives of those aged 50 years or older, expressed displeasure that the initiative didn’t move into law. The organization expresses hope that the Senate’s decision is temporary. The institution called the Senate’s vote an ‘inadequate’ solution. “One in five mortgages is underwater–homeowners have more debt than value in their homes. Older homeowners have seen property values plunge, their equity disappear and foreclosure signs go up around them” says the AARP website. The AARP holds that current refi options are not enough: “Reducing mortgage payments by lowering interest rates and extending loan terms, while helpful for some homeowners, fails to recognize a homeowner’s total indebtedness, and particularly the rising medical debts of older homeowners, and fails to respond to the serious loss of home equity.”