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The bankruptcy cram down measure has come full circle, evolving from long shot to sure thing and then back to uncertain, before dying two weeks ago on the Senate floor. 

Underscoring how rapidly and definitively the bill’s prospects had changed, the final vote —51-45 — wasn’t even close to the 60-vote margin required to pass the legislation giving bankruptcy judges the authority to modify the terms of residential mortgages.  Moderate Democrats – 14 of them – joined a solid Republican block in defeating the measure. 

Sen. Richard Durbin (D-IL), the chief sponsor, had introduced the cram down measure as an amendment to legislation revising Hope for Homeowners, the mortgage refinancing program Congress enacted last year.  The lopsided defeat makes it unlikely the cram down proposal will survive a House-Senate conference to resolve differences with the House version of this bill, which does include the provision.

Few would have predicted this outcome a few weeks ago, when Citicorp, breaking ranks with the banking industry, decided to support the cramdown provision.   To win Citicorp’s support, Durbin made several concessions, narrowing the bill’s scope to include only mortgages originated as of the enactment date, requiring borrowers to certify that they had attempted to discuss a loan modification with their lenders within 10 days before the bankruptcy filing, and specifying that only “major” violations of the Truth-in-Lending Act would completely extinguish a lender’s mortgage claims in a bankruptcy proceeding.  At the time, Durbin and others predicted confidently that Citicorp’s support would be the straw that broke the back of the banking industry’s opposition. 

But that prediction proved premature.  As several moderate “Blue Dog” Democrats criticized the measure, industry trade groups, which had been looking for ways to soften the bill, decided they had a reasonable chance of defeating it and so dug in their heels, refusing to give ground during negotiations preceding the Senate vote.  Additional concessions – including the addition of a provision denying cram down relief to borrowers eligible for loan modifications under president Obama’s housing assistance program —had no effect. 

Durbin blamed the intransigence of the banking lobby – specifically the American Bankers Association, the Mortgage Bankers Association, and the Financial Services Roundtable — for the bill’s defeat.  “I have worked with them on so many issues,” he told reporters,” but I have never found them more unyielding   and unreasonable than on this issue.”    

Cram down supporters, including President Barack Obama, argued that it would give struggling homeowners leverage they don’t currently have to persuade lenders to modify their mortgages.  But critics, including the credit union trade organizations, argued that the measure could unintentionally do more harm than good by undermining lender and investor confidence in their ability to enforce the terms of mortgage loans.   

Assailing industry trade groups for refusing to work toward a compromise, Durbin noted the disconnect between the government  bail-out aid many banks have received and their refusal to back a measure that, some analysts have predicted, could cut foreclosures by 20 percent.

“Why is it that we can find hundreds of billions of taxpayers’ dollars…to come to the rescue of bad banking decisions, rotten investments, mortgages that were fraudulent on their face, but can’t summon the political will to do something about 8 million families in America that are going to face foreclosure?” Durbin complained.

Although opponents have hailed the Senate’s rejection of the cram down provision as a major victory, their celebration, like earlier predictions that the measure would be approved, may prove premature. Foreclosures continue to set records and voluntary modification efforts, to date, have done little to stem that tide.    More than half the modifications tracked by the Office of the Comptroller of the Currency and the Office of Thrift Supervision in their periodic reports have failed – primarily because lenders have  restructured payments rather than reducing them, providing temporary rather than long-term relief for borrowers. 

Because the Obama Administration’s modification plan requires lenders and servicers to reduce the payment burden on borrowers, analysts say it has a better chance of providing sustainable relief.  But with 20 percent of all outstanding mortgages now under water, some fear this initiative won’t be able to make much of a dent in the foreclosure problem.  If the loan modification success record doesn’t improve considerably and in fairly short order, Jaret Seiberg, a policy analyst with the Washington Research Group, told American Banker, “I think the mortgage bankruptcy [legislation] returns with a vengeance.”  


Behind a campaign that could have been branded “never again,” the House has approved legislation designed to prevent the lending abuses widely blamed for creating the subprime mortgage crisis and the collateral economic damage it has caused.  With 60 Republicans lining up with Democrats in support, the measure passed on an unusually bipartisan 300-114 vote. 

“If Congress had enacted these long overdue mortgge lending reforms, which Democrats have been advocating since 1999, the subprime meltdown could have been avoided altogether,” said Rep. Brad Miller (D-NC), who co-sponsored the bill with Representatives Mel Watt (D-NC) and Barney Frank (D-MA), chair of the House Financial Services Committee. “The legislation will ensure that the reckless predatory mortgage practices that started this crisis will not happen again,” Miller said in a press statement.

 Modeled on an anti-predatory lending ill enacted in North Carolina 10 years ago, the House bill requires lenders to do more to assess the repayment ability of borrowers, expands consumer disclosure requirements, prohibits compensation structures designed to “steer” borrowers to higher-cost loan products, and expands the ability of consumers to sue the financial institutions that securitize loans as well as the lenders that originate them. 

Key provisions of the bill:

  • Direct the Federal Reserve to adopt regulations requiring mortgage lenders to ensure that borrowers have “a reasonable ability to repay” home purchase mortgages, and to determine that refinanced mortgages provide a “net tangible benefit” the borrower.
  • Expand the number of loans subject to expanded protections under the Home Owner Equity Protection Act (HOEPA) and expands those protections by barring “excessive” fees for payoff information, loan modifications or late payments, prohibiting the financing of points and fees, and prohibiting practices that “increase foreclosure risks,” including balloon payments and call provisions.
  • Establishes a safe harbor, easing the retained risk requirement and the liability exposure for qualified loans, defined as conventional, 30-year-fixed-rate mortgages, shorter-term loans that are fully-amortizing and don’t exceed the prime rate by more than 1.5 percent (for first mortgages) and 3.5 percent for second mortgages, and prime adjustable rate mortgages that reset at no more than 1.5 percent over prime.  The legislation also allows Fannie Mae, Freddie Mac, the Department of Housing and Urban Development, the Federal Housing Administration, and the Veterans Administration, among other government agencies, to determine which of the loans they purchase or insure qualify for the statutory safe harbor. 
  • Requires loan originators to retain a “material position” equal to at least five percent of the credit risk for every loan they “transfer, sell, or convey” to a third party.  This provision, opposed fiercely by the financial industry and by industry regulators, was softened considerably, giving regulators the authority to determine the “amount and form” of retained risk required for loans that meet the “safe harbor” standards defined by the statute or by industry regulators.
  • Restrict financial incentives ¾specifically including yield spread premiums — that “steer” subprime borrowers to higher-cost products.

Not surprisingly, mortgage brokers, who are compensated through YSPs, have objected to this provision, despite an amendment specifying that it would permit this form of compensation s as long as it is not linked to high-cost loan terms.  These restrictions may have “negative consequences” for both consumers and brokers, the National Association of Mortgage Brokers (NAMB) has warned, citing both limitations on the ability of consumers to choose the financing options they prefer, reduced competition, and “the potential inability of small business owners involved in the mortgge origination industry to earn a living.” 

Mortgage brokers are particularly concerned about the provision that appears to bar the financing of points and fees on subprime loan.  “If true,” a NAMB spokesman told reporters, “consumers would have to pay the broker with cash, [making] it difficult for brokers to compete with banks, which can [still collect] servicing-released premiums when they sell loans to investors.”

Despite the lingering objections, supporters think the decisive vote in the House will improve the bill’s prospects in the Senate.  Sen. Christopher Dodd (D-CT), the chairman of the Senate Banking Committee, declined to push the measure in the Senate last year and hasn’t said anything about it thus far, but Frank remains optimistic.  Point to the House vote, he told American Banker recently, “Things have changed.  I think this has momentum.”   


Looking somewhat desperately for a silver lining in the dark housing market clouds, industry executives have noted that the plummeting home values that are wrecking havoc for underwater owners who want to sell or refinance their homes, are boosting affordability for would-be home buyers.  But homeownership remains beyond the financial grasp of workers in many job categories, including those targeted by the federal stimulus package, according to the Center for Housing Policy, which produces an annual report assessing affordability as measured by housing costs and wages in different parts of the country.

The most recent edition of the report, “Paycheck to Paycheck,” finds that workers in workers in four of five construction-related occupations, which should benefit directly from stimulus spending in many states, are unable to afford to buy or rent median-priced homes in most of the 200 metropolitan areas covered by the survey.  Construction managers alone fared well in this category, with an annual salary of about $100,000 making home ownership affordable in all but nine of the markets. 

On the rental side, although construction managers and carpenters could afford to rent a home in the majority of the 210 rental markets studied, equipment operators could not afford the typical rent for a two-bedroom apartment in 52 of the markets, long haul truck drivers in 57, and construction laborers were virtually priced out, unable to afford to rent a two-bedroom apartment in 161 of the rental markets studied.

 “Contrary to popular belief, the recent decline in home prices has not resolved the nation’s housing affordability problems,” said Jeffrey Lubell, executive director of the CHP.  “Working families – including most of the workers who will be hired as a result of federal spending in the stimulus package – still cannot afford to buy a home in most markets, and many also struggle to afford their rents.” “This study confirms the importance of using the recent decline in home prices as an opportunity to put long-term solutions into place,” added Chairman John McIlwain, chairman of CHP and senior resident fellow at the Urban Land Institute (ULI). “By acquiring well-located properties made vacant through foreclosure and by instituting policies that can ensure that a modest share of future development is affordable, communities can bring housing within reach of working families,” McIlwain suggested.

The 20 least affordable markets for home buyers included only one New England Community – Bridgeport, CT.  Boston ranked 23rd this year (compared with 28th last year), while Cambridge moved from 23rd last year to 17th this year.  San Francisco again was the least affordable housing market, followed by New York City, San Jose, CA, Honolulu, HI and Santa Cruz, GA.  The most affordable communities for homebuyers are Saginaw, MI and Youngstown, OH.

San Francisco, Honolulu and Santa Cruz (GA) also ranked as the three most expensive rental housing markets, with Boston and Cambridge tied for 1th place in this ranking – less affordable than New York, Washington, D.C. and West Palm Beach. 

The most affordable rental markets are in Wheeling, WV, Brownsville and El Paso, TX and Lima and Youngstown, OH.   


The mortgage reform legislation approved by the House included one provision, little noticed but cheered by the bill’s most strident critics:  Language requiring the Department of Housing and Urban Development (HUD) to withdraw its controversial overhaul of the regulations implementing the Real Estate Settlement Procedures Act (RESPA).  Slated to take effect early next year, the new rules, have been criticized by virtually every segment of the housing and housing finance industries and opposed outright by many of them.   Nine industry trade groups, including the National Association of Federal Credit Unions (NAFCU) supported the amendment, introduced by Rep. Judy Biggert (R-IL).   The amendment requires HUD to undertake a joint rulemaking effort with the Federal Reserve Board, to ensure consistency between the mortgge disclosure rules promulgated by the two agencies.    In addition to NAFCU, the American Financial Services Association, the American Land Title Association, the Consumer Bankers Association, the Financial Services Roundtable, the Housing Policy Council, the Mortgage Bankers Association and the National Association of Mortgage Brokers all signed the letter urging approval of Biggert’s amendment.

A number of other industry groups signed a letter earlier this year, asking HUD to withdraw and rethink its rules, which are designed to simplify loan disclosure, making it easier for borrowers to understand the terms of the loans they receive and to compare different loan products.  The NAMB and the National Association of Home Builders have filed separate suits challenging the new rules.  NAMB is seeking an injunction, barring the rules from taking effect, as scheduled, early next year.  The NAHB is challenging one provision, prohibiting builders from offering homebuyers discounts or other incentives linked to their use of mortgage and title companies affiliated with the builder.  HUD announced recently that it will delay for 90 days the effective date of that “required use” provision and will decided “whether to withdraw it,”


The Federal Trade Commission is cracking down on companies offering loan modification services they fail to deliver.  A U.S. district court has approved an agency request for a restraining order against two companies claiming falsely to be part of the Hope Now Alliance, a government-endorsed network of lenders and counselors working to help financially strapped borrowers avoid foreclosure.  In fact, the FTC complaint claims, the two companies – calling themselves “New Hope Modifications” and “Hope Now Modifications” — did not provide modifications at all or even negotiate with lenders on behalf of the borrowers they purported to help.  Instead, they accepted up-front fees, sometimes diverting a mortgage payment to that end, and then refused to refund the fee, as their marketing materials promised, if the modification was unsuccessful.Among the “misleading” statements, the FTC cited:  “[We] can help you save your credit and your home, often within 60 to 90 days,” “We stop foreclosure in its tracks,” and “the fast and easy way to save your home.” 

“With many consumers desperate for relief and afraid they might lose their homes in these difficult economic times, some unscrupulous individuals are preying on these fears for their own financial gain,” FTC Chairman Jon Leibowitz said in announcing the court decision.  “We won’t hesitate to take action against these types of con artists now and in the future,” he added.