Stimulus Package to Include Cram-Downs: Report

The latest round of economic stimulus currently being crafted by Senate Democrats is likely to include controversial legislation allowing so-called “cram-downs” of mortgage debt in bankruptcy, according to a Reuters report Monday evening. The proposal, long opposed by key lobbyists in the mortgage industry, would allow judges to reduce mortgage debt on primary residences as part of a bankrupt borrower’s debt restructuring plan. House Democrats are likely to unveil legislation on bankruptcy reform that allow cram-downs Tuesday morning, Reuters reported; Rep. Brad Miller (D-NC), a member of the House Financial Services Committee, is set to introduce the bankruptcy reform bill, the news agency said. House Democrats are counting on the support of Sen. Richard Durbin (D-IL), who in November re-introduced similar legislation to reform bankruptcy law in order to allow for cram-downs. Democrats, including Durbin in particular, have long advocated allowing judges to modify principal amounts of mortgages on primary residences in Chapter 13 bankruptcy cases filed by debtors; currently, such modifications are precluded by law. In contrast, Republicans and most industry groups have strongly opposed so-called ‘debt cram-down’ proposals for mortgages, saying that allowing cram-downs would add to the costs of a mortgage for most consumers and swell the ranks of borrowers filing for bankruptcy protection. Senate Democrats tried and failed to get cram-down provisions included in the Housing and Economic Recovery Act of 2008 during July; and they tried again during bargaining over the Emergency Economic Stabilization Act, as well. President-elect Barack Obama, however, has said repeatedly that his administration will make passing cram-down legislation a priority when he takes office in January. “Economic conditions have only worsened since we last debated this plan,” Miller told Reuters, in an interview. “Until we stop the slide in foreclosures and falling home prices, the economy will get worse still.” But the top lobbyist at the Mortgage Bankers Association, Francis Creighton, told the news service that allowing cram-downs would lock “the pendulum” of credit “at an overly restrictive point.” The mortgage lobbying group has said that it believes allowing cram-downs would boost mortgage rates by 1.5 to 2 percent, according to Congressional testimony in Oct. 2007 by MBA chairman David Kittle. For his part, the current push represents the second time at bat from Miller, who has long pushed for cram-downs; he co-sponsored a proposed bill to allow for cram-downs in 2007, a measure that Kittle characterized at the time as “a sledgehammer attack” on secured lending. Write to Paul Jackson at [email protected].