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Mortgage Cram Downs in Legislative Limbo

February 17, 2009

This post originally appeared on’s End Homelessness Blog.

Last week, I posted about judicial loan modifications, a foreclosure prevention tactic that could provide a 20% reduction in foreclosures. To save these homes, Congress needs to pass legislation to give bankruptcy judges the authority to modify mortgage loans, either by passing “stand alone” legislation for this purpose (like S. 61 and H.R. 200), or by attaching this change to a larger piece of “must pass” legislation.

So far, despite the fact that judicial loan mods could prevent a million foreclosures without costing taxpayers a penny, this proposal remains in legislative limbo. If you want to tell Congress to get moving and pass this, you can visit the AFFIL website and send them a letter.Judicial loan mods were included in early drafts of both the Troubled Asset Relief Program (TARP)-commonly known as the bailout-and the just-passed stimulus bill. But they got pushed out of the final versions of both.

The next possibility is attaching loan mods to the big omnibus appropriations bill, which Congress will deal with after the Presidents Day recess.

During his campaign, President Obama strongly supported allowing bankruptcy courts to modify mortgages. And yet, it was the Administration that asked Congress to keep loan mods out of the stimulus bill. This was part of the effort to garner Republican support for the “must-pass” stimulus, but it sure is easy to question that decision now, since no Republicans in the House voted for the stimulus anyway.

Still, there’s hope that the Administration will push to make this change happen. As recently as last week, President Obama said that it “made no sense” that judges are not allowed to change bankruptcy terms. And, although the Treasury’s “Financial Stability Plan” was woefully short on measures to combat foreclosures, when introducing it last week Secretary Tim Geithner said that loan modifications will be part of their forthcoming housing plans. These housing plans are due out this week, and we’re hoping they include judicial loan mods and other important provisions.

As for passing a stand-alone bill which would allow bankruptcy judges to modify loans, Representative John Conyers’ H.R. 200, “Helping Families Save Their Homes in Bankruptcy Act,” did make it through the Judiciary Committee in the House. (It helps that Conyers is the chair of this committee.) There’s no word on when the full House will take up the bill, and the Senate hasn’t addressed S. 61, which goes by the same name, introduced by Senator Dick Durbin.

We may not be able to rely on the stand-alone bills to get this change through. I spoke with one consumer advocate who worries that they don’t have enough “oomph” to make it through Congress, and insiders seem to think attaching loan mods to a “must-pass” piece of legislation is a better way to go. (Apparently, “oomph” is a highly technical inside-the-beltway term.)

One more thing is worth mentioning. On January 8, Citibank came out in support of allowing judicial loan modifications. Yes, as in Citibank the bank. Other banks are still holding out and lobbying strong against the measure, but you have to smile when one of the nation’s biggest banks admits this consumer-friendly idea might be a good one.

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