'Cram Down' Home Foreclosures

Congress is considering bills that would allow federal bankruptcy judges to amend home mortgages, changing the terms to prevent families from losing their homes to foreclosure.

Lobbyists for the nation's largest financial institutions are on red alert; they're waging an all-out campaign to keep Congress from enacting such a reform.

It should be noted that these are the same institutions whose recklessness and foolishness on the subject of mortgage lending significantly contributed to the nation's current economic crisis.

They are dead wrong about bankruptcy reform, too.

There's nothing novel or controversial about the procedure being considered by Congress. It is referred to as a bankruptcy judge's "cram down" (or "strip down") authority. Judges already use it to modify most kinds of secured debt in bankruptcy proceedings — including mortgage loans on vacation homes and multifamily investment properties.

The federal Bankruptcy Code gives some people experiencing serious financial troubles a chance to reduce debt — and hold onto some of their property — under court-approved repayment plans. The court has broad power to modify the terms of most kinds of debt, including by reducing — or "cramming down" — amounts owed. Debts may be reduced to the actual value of the collateral that secures it.

Say, for example, that someone seeking bankruptcy protection has borrowed $150,000 and has put up a $10,000 piece of family jewelry and a two-family investment property with a market value of $80,000 to secure the loan. The court could reduce the debt to the $90,000 value of the property. The debtor, meanwhile, would not have to sell the property so long as he or she abides by the terms of the repayment plan.

This is not the case now with home mortgage loans. Banks and other lending institutions have enormous influence over bankruptcy legislation.

They made sure mortgage loans on a person's primary residence are an exception to the "cram down" rule.

Now the nation faces home foreclosures of epidemic proportion. Mortgage lenders have unveiled all manner of voluntary relief programs for distressed homeowners — the "HOPE NOW" effort has received the most publicity. But these programs have been unmitigated busts.

Some mortgage holders claim to be willing to renegotiate mortgage loans to keep families from losing their homes. But just a tiny fraction of legitimate candidates for relief have been helped. Banks argue that mortgage loans often have been repackaged and "tranched" so many times, it's impossible to get the owners of mortgage-backed securities to sign off on the renegotiated loans.

Lending industry lobbyists, meanwhile, have enlisted the support of Republican members of Congress — most prominently in the U.S. Senate — to prevent the special treatment accorded mortgage lenders from being lifted.

Missouri Republican Sen. Christopher S. "Kit" Bond, for example, stood on the floor of the Senate less than a year ago advancing the lending industry line. He argued that allowing bankruptcy judges to cram down home mortgages would increase the cost of borrowing to all homeowners "by 1.5 to 2 percent."

The argument is bogus. It has been debunked by a growing number of financial analysts. It is a scare tactic designed to derail a carefully crafted and much-needed consumer protection.

Bankruptcy reform will not cure the foreclosure crisis. But it could make a huge difference, bringing prompt relief to homeowners — not speculators — with legitimate prospects of repaying the value of their home.

But the financial services industry fights as hard to preserve its legal prerogatives as it does to keep billions of dollars in bonuses flowing. Indeed, thanks to the efforts of their lobbyists and political allies, the debate over bankruptcy reform appears to be delayed until later in the year, to prevent Republicans objections in the Senate from bottling up the stimulus bill.

Politicians are playing footsie with the financial services lobby — and the foreclosures mount.

REPRINTED FROM THE ST. LOUIS POST-DISPATCH.

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