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Cramdown Legislation Hits Senate Roadblock

A hotly-contested legislative proposal that would allow bankruptcy judges to modify mortgage debt in certain bankruptcy cases appears to be losing momentum in the U.S. Senate, various sources said this week. So-called 'cramdown' legislation, which passed a key vote in the House of Representatives in early March, has been facing much stiffer opposition in the Senate and has forced the Senate bill 61's primary sponsor, Richard Durbin (D-IL), to back away from a harsher stance he had taken with respect to the cramdown proposal.

"Durbin has remained wedded to the cramdown bill," said Dr. Joseph Mason, professor of banking at Louisiana State University and a senior fellow at the Wharton School. "The industry is done with it, as is the rest of Congress. He might get it tacked on to something else, though."

Both the American Bankers Association and the Mortgage Bankers Association have come out strongly against proposed cramdown legislation, with the MBA arguing that such legislation would increase primary mortgage rates, as investors adjust their risk tolerances. The MBA's assertion has been met with criticism from some researchers, including Adam Levitin, a Georgetown law professor. "There is no empirical evidence that supports a conclusion that permitting either strip-down or other forms of modification of principal home mortgage loans in bankruptcy would have more than a minor impact on mortgage interest rates," he said in Congressional testimony early last year.

Nonetheless, bankers say that the current Obama administration's Homeowners Affordability and Stability Plan, which includes provisions to modify loan payments down to 31 percent of a borrower's income, effectively makes further modifications via bankruptcy somewhat repetitive.

In February, Durbin had suggested to American Banker 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.

“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.”

Durbin apparently wasn't as willing to negotiate on the Senate bill as he had originally claimed in February. The ABA says they walked away from Senate negotiations earlier this month, because Durbin would not concede to allowing cramdowns to apply only to subprime loans. Durbin spokesman Max Gleischman denied the suggestion that the Senate version of the cramdown bill was DOA, however, telling HousingWire that "all terms are being negotiated right now, there is not one main sticking point."

Over the congressional recess, Durbin’s team had worked furiously with the nation's bulge banks, including JP Morgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), and Bank of America Corp. (BAC), as well as key credit unions, in hopes of swaying more Democrats in the Senate to support the proposal, according to sources involved in the negotiations. Press reports earlier this week from Durbin’s camp said progress had been made, but sources inside the negotiations now admit that the deal on the table currently would likely still not encourage enough votes to pass a vote in the Senate.

Much of the behind-the-scenes opposition has come from Arizona Senator Jon Kyl, a Republican, who sources say has been strongly in the corner of bankers over the proposed bankrupty reform; Democrats, including Durbin, had originally attempted to push cramdown legislation through the Senate by tying the legislation to a proposal that would see the Federal Deposit Insurance Corp.'s borrowing authority from the Treasury increased from $50bn to $100bn. Sources say Senate Republicans are now confident they will get the FDIC expansion measure through the Senate, irrespective of the fate of the controversial bankruptcy proposal.

"Democrats have tried to strike a compromise with some in the banking community by holding FDIC borrowing authority hostage to passing cramdown," Kyl told an industry conference on April 1.

"Fortunately, the industry has politely declined. There is no reason to concede on cram down when you have the votes to stop it. As Senator Phil Gramm once said, ‘Never take hostages you’re not willing to shoot.’ On [March 27], the Majority Leader signaled that he wouldn’t shoot the hostage, FDIC relief. He said, 'If we can't get the votes for [cramdown], and I am hopeful we can -- I am semi-confident we can -- then what I'll do is take that off [the bill] and do the other banking provisions.'"

"Durbin had a hell of a time coming up with a bill that’d pass the Senate," said Burt Ely, a banking expert and principal of Ely & Co. "He’s watered it down so much that his proposal now limits the accessibility or intention of the bill. Even if he got it passed, the gulf is so big it wouldn’t even get out of [the House] conference committee to be enacted into law."

Not surprisingly, consumer advocates are seeing red.

"With Durbin, Dodd and Reid doing the bidding for the banks, this current state of the cramdown bill will have virtually no impact for at-risk borrowers," says Bruce Marks, CEO of Neighborhood Assistance Corp. of America, a mortgage broker and consumer activist. "The Senate Democrats have made no measurable actions this year to help the housing crisis."

Late Tuesday, in an apparent effort to save a measure he feels is important to help distressed homeowners facing foreclosure, Senator Charles Schumer (D-NY) said he would instead try to tack the cramdown measure to other pending banking/housing legislation being considered in the Senate, rather than including it directly in proposed legislation, bringing it up for a quick vote as the Senate considers its options.

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