Thursday, April 16, 2009

Mortgage Cram-Down Stalls in Senate, May Be Revised

Posted on Bloomberg by Dawn Kopecki:

Senate Democrats are scaling back legislation that would let bankruptcy judges alter mortgage terms because lawmakers don’t have enough votes for passage, a spokesman for Senate Majority Whip Richard Durbin said.

The main “sticking point” is whether the measure, which passed the House of Representatives in March, should be limited to certain loans or a specific timeframe, Max Gleischman, a spokesman for Durbin, an Illinois Democrat, said today.

The delay of more than a month in passage of the so-called cram-down legislation holds up a key component of President Barack Obama’s anti-foreclosure initiative announced Feb. 18. That plan seeks to help as many as 9 million Americans modify or refinance their mortgages to more affordable terms.

“Investor buzz surrounding a potential deal on cram-down legislation seems somewhat premature,” Andrew Parmentier, a bank policy analyst for research firm Height Analytics in Washington, said in an investor note today.

The legislation would authorize bankruptcy judges to modify distressed borrowers’ mortgages closer to the lower market value of their homes, even over the objections of creditors. Judges would be able to reduce principal, lower the interest rate, change the maturity, or convert the loan to a fixed rate. The House version of the legislation would apply to all loans originated before the bill takes effect, while bankers and credit unions lobbied to limit it solely to subprime mortgages.

“That’s a non-starter for Democrats,” Gleischman said. “We’re working to find something in between those two points.

“The bill as passed by the House doesn’t have the votes to pass the Senate,” Gleischman said. “There is no agreement.”

Draft Proposal

Negotiations with banks over provisions are still taking place, he said. While a number of potential provisions “have been put to paper,” there is no formal offer, he said.

A draft proposal that Durbin’s staff offered this week would prohibit borrowers from amending their mortgage terms in bankruptcy if they have turned down a loan modification under Obama’s Homeowner Affordability and Stability Plan, according to bankers involved in the discussions who asked not to be named because the proposal was confidential.

Judges also would only be allowed to reduce outstanding principal to market value and interest rates to the conventional rate plus a “reasonable premium for risk,” according to the bankers. Repayment may be extended for 40 years, and borrowers that get principal reductions must share half of any home price appreciation, up to the original amount owed, if the property is sold while they are still in bankruptcy, the bankers said.

Durbin’s plan would be good only until 2014 and would apply only to mortgages under $729,750 that were originated before Jan. 1, 2009, according to an outline of the proposal.

Obama Plan

The Congressional Budget Office said in a Feb. 23 report that the House legislation may encourage more people to file for bankruptcy. More than 1 million households would benefit from the bill and an estimated 350,000 of those would be likely to take advantage of the law in the next 10 years, the CBO said.

Obama’s main loan modification initiative, which targets 3 million to 4 million homeowners, would require lenders to cut interest rates to as little as 2 percent, extend repayment terms as long as 40 years and forbear or forgive outstanding principal as necessary to reduce homeowners’ monthly payment to a maximum ratio of 38 percent of their income for five years.

The Treasury Department would be used to cover half the costs to further reduce their payments to a ratio of 31 percent. The Treasury has set aside $75 billion in taxpayer funds to pay companies to modify loans and subsidize borrower payments.

Under Durbin’s plan, borrowers in foreclosure with incomes less than 80 percent of the median in their area or whose mortgage payments are less than 31 percent of their gross monthly pay would be ineligible for principal reductions.

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