Cram Downs Cool Down

Written by: Steve Cook   Tue, March 17, 2009 Crisis Programs, Crisis Watch

An intense lobbying campaign by the financial services industry has slowed and possibly killed legislation that would give bankruptcy courts the power to write down mortgages.

Backed by the Obama Administration, passed by the House last month and on a fast track for enactment, the legislation hit a landmine last week when the banking lobby’s masterful assault bore fruit in the more conservative Senate.

The legislation that passed the House limits cra downs to existing mortgages; loans made in the future wouldn’t qualify. Bankruptcy judges can write down a primary mortgage only if the borrower can show that efforts to modify the loan were made prior to filing for bankruptcy. Almost certainly it will be modified further if it is to pass the Senate, perhaps by limiting cram downs to subprime and Alt-A loans, which alone could cost lenders $190 billion.

The Congressional Budget Office estimates the cram down legislation could keep 350,000 families in their homes over the next 10 years, or 35,000 a year. With at least 900,000 foreclosures predicted this year, that’s about a 4 percent reduction in the inventories of discounted REO properties expected to hit the market.

The Mortgage Bankers Association estimates cram downs would tack an additional 150 basis points onto the cost of a loan.

The bill needs 60 Senate votes to clear a procedural hurdle to passage, and Democratic aides say they are several votes shy. They had hoped the bill would reach a vote before the April recess but it has yet to be scheduled. Senate aides involved in the talks say that timing may slip further. Backers are scrambling for support, but so far overtures to major lenders and the credit union industry have failed to win new allies in the financial services industry. Only Citigroup, which was involved in the negotiations behind the House bill, supports it.

“The momentum has swung against cram downs,” Senator Bob Corker (R-TN) told the Wall Street Journal last week

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