The mortgage “cram-down” bill that stalled in Congress earlier this year will be attached to broader legislation and voted on this week, House Financial Services Committee Chairman Barney Frank said.
Frank, a Massachusetts Democrat, said today he will support a full House vote on the measure, which House Judiciary Committee Chairman John Conyers will offer as an amendment. The House begins debating financial-industry regulatory changes including stricter rules for derivatives and mortgage lending.
The cram-down provision would let federal judges lengthen mortgage terms, cut interest rates and reduce loan balances for homeowners in bankruptcy court, even if the lender objects, on the borrower’s primary residence.
The amendment is identical to legislation that passed the House in March and later failed to get to a vote in the Senate. Bankruptcy judges are now allowed to alter loan terms on vacation homes or investment properties. Primary residences used to be eligible before Congress rewrote bankruptcy laws in 2005.
Banks and broker-dealers are lobbying against the bill, telling House leaders in a letter today that the legislation would increase bankruptcy filings, lead to abuses of the court system and undermine efforts to stabilize the housing market.
“Enacting cram-down legislation would make things worse by adding even more risk to the mortgage market,” the Mortgage Bankers Association, Financial Services Roundtable and eight other trade associations said. “The massive potential losses generated by judicial modification will directly impact Fannie Mae, Freddie Mac and the government mortgage guarantee agencies, and could well reverse recent gains in credit sector growth.”
The proposal by Conyers, a Michigan Democrat, would require borrowers to seek a loan modification beforehand, giving judges the discretion to decide whether a borrower was offered a “qualified” plan that would bar them from changing the mortgage terms in bankruptcy.
A qualified modification must meet standards set out by the Obama administration’s Making Home Affordable Program this year. The program calls for lenders to voluntarily reduce a borrower’s monthly payment to as little as 31 percent of gross income by first lowering the interest rate on the mortgage, then lengthening repayment terms and then cutting the outstanding loan balance if necessary.
Borrowers taking advantage of provisions in the legislation would have to reimburse mortgage companies for a portion of losses if the property is sold before the debtor completes a five-year bankruptcy repayment plan.
Chapter 13 of the bankruptcy code allows individuals with regular income to pay all or part of their debts without losing their homes to foreclosure.