Renner: Fight Rages Over a Tool Called "Cram Down"

Washington, DC - A fight on Capitol Hill rages over a tool called "cram down." Proponents say is essential to fixing the foreclosure crisis and empowering homeowners to negotiate with the banks that hold their mortgages. Opponents say it will make lending riskier and raise interest rates. The battle lines are drawn, pitting Democrats against Democrats.

At the heart of the meltdown on Wall Street are piles and piles of mortgage loans for houses, which have been losing value for years as the housing bubble deflates. Many of these mortgages are "underwater," meaning the house is worth less than the amount owed on the mortgage. Many of these loans are the notorious Adjustable Rate Mortgages, which began at a lower interest rate and has now increased, driving up monthly payments. At the same time, millions of people across the country have lost their jobs or had their wages cut as a result of the contracting economy.

The situation has led to record foreclosure rates - almost 700,000 this year, or one every 13 seconds, according to the consumer group Center for Responsible Lending (CRL).

Economists and consumer advocates say that the foreclosure crisis is the root of the banking crisis and must be fixed in order to save the economy. But there is a collective action problem - renegotiating mortgages posses risks to the banks that own them and the middlemen (known as loan servicers), who manage the loans. The borrowers are at the mercy of the lenders and have no leverage to force them to negotiate.

This is where Congress comes in. Under current law, bankruptcy judges do not have the power to change the terms of a mortgage on a consumer's primary residence during bankruptcy proceedings. With the support of the Obama administration, Democrats in Congress have introduced the Helping Families Save Their Homes in Bankruptcy Act of 2009. One provision of the act would grant bankruptcy judges the power to alter troubled mortgages. This proposal has been a priority for powerful Democrats and has been near the top of their legislative agenda since the beginning of the year.

The CRL has been monitoring national foreclosure rates and policy plans to address the problem. In an interview with Truthout, CRL spokesperson Kathleen Day said the "cram down" provision is a vital piece of the overall solution and compliments the incentives offered to lenders, loan servicers and homeowners under the Obama administration's homeowner rescue package.

A plan passed under the Bush administration meant to help people refinance, known as HOPE for Homeowners, did not include the threat of "cram down," and was also missing key incentives for the lenders and loan servicers. The program allocated $300 billion and was supposed to help up to 400,000 people avoid foreclosure, according to the Congressional Budget Office.

More than six months later, only one homeowner has successfully made it through the entire process and refinanced their mortgage under the program, according to the Federal Housing Administration.

"Bankruptcy is the stick. Bankruptcy is the only leverage consumers have. They would be able to say to the lender 'look, either you work with me or a judge is going to do it down the line,'" Day said, adding "What the industry is going bananas over is giving bankruptcy judges the ability to modify a mortgage on a person's primary residence the way they can currently modify every other kind of contract. It's ridiculous, a judge can't touch a mortgage on a person's primary residence but they can modify [a loan] on a person's vacation home or their yacht or anything else."

"Most Americans today, in trouble, are desperately trying to hold onto their primary residence," said a proponent of the "cram down" power, Senate Banking Committee Chairman Chris Dodd (D-Connecticut) in January, adding "The notion here is to create the environment for negotiation so that those who are holding the mortgages will not wait until bankruptcy, that they'll sit down ahead of time with the prospects that they're going to have this mortgage rewritten in bankruptcy and say, 'Let's see if we can do it before they go to bankruptcy court.' It creates a more positive negotiating environment."

Not all Democrats agree with Senator Dodd. A handful of self-labeled "moderate" Democrats stand in the way of giving judges the power to reduce or "cram down" mortgages during bankruptcy.

According to multiple press reports, the Democratic opposition to the bankruptcy power know as "cram down," has been led by Sen. Evan Bayh (D-Indiana). Indiana has the 13th highest foreclosure rate in the country, according to Realty Trac.

Senator Bayh currently leads a group of 16 so-called "moderate" Democrats, who have become increasingly powerful as they represent the deciding votes in the Senate.

The 16-member coalition known as the Moderate Dems Working Group was announced in a press release on March 18.

At this time, it is unclear where the members of the Moderate Dems Working Group stand on the "cram down" legislation. Only three of the 16 senators returned calls inquiring about their stance on granting judges the power to adjust mortgages in bankruptcy.

The three responses were evenly split. A spokesperson for Sen. Ben Nelson said that he opposed the provision because it would raise interest rates on other borrowers and further destabilize the mortgage industry. A spokesperson for Sen. Kay Hagan (D-North Carolina) said that Senator Hagan "had reservations about the bill and is currently considering changes and discussing it with her colleagues." A spokesperson for Sen. Bill Nelson (D-Florida) said that Senator Nelson has supported "cram down" in the past and continues to support it in some form.

The senators from the Moderate Dems Working Group who failed to return multiple phone calls inquiring about their stance on the bankruptcy provision were: Evan Bayh (D-Indiana), Tom Carper (D-Delaware), Blanch Lincoln (D-Arkansas), Herb Kohl (D-Wisconsin), Mary Landrieu (D-Louisiana), Joe Lieberman (I-Connecticut), Claire McCaskill (D-Missouri), Mark Pryor (D-Arkansas), Jeanne Shaheen (D-New Hampshire), Mark Warner (D-Virginia), Mark Begich (D-Alaska), Mark Udall (D-Colorado) and Michael Bennet (D-Colorado).

Corporate special interest groups have been lobbying aggressively against the "cram down" legislation. The Mortgage Bankers Association and banks like JP Morgan Chase, Bank of America, and others have initiated an all-out effort to prevent it. Industry representatives argue that the bankruptcy reform legislation would further destabilize the already fragile mortgage market by adding unpredictable risks and making the value of mortgaged-backed securities harder to establish.

The lobbying effort succeeded in delaying consideration of the legislation and may have derailed it entirely. Jim Manley, Senate majority leader Harry Reid's spokesman, originally said that the bill would be brought up for a vote before the April recess. After a handful of Democrats jumped ship in March, Manley revised his estimate, saying that the bill would be delayed until after the recess.

It has been reported that the Democrats do not have 60 votes in favor of the "cram down" provision. However, what is often left out is the fact that Democrats only need 60 votes to break a Republican filibuster. The Democrats need a simple majority to pass the bill and could bring the bill to the floor for a vote and challenge Republicans to stand and filibuster, a move that would be dangerous in the current political climate where republicans have been criticized for being the party of "no."

Congress is scheduled to reconvene on Monday, April 20.

Matt Renner is an editor and Washington reporter for Truthout. He can be reached at Matt@truthout.org. MORE BY THIS AUTHOR »

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