Mortgage Cram-Down Legislation Resurfaces

The cram-down debate is back: Sen. Richard Durbin (D-IL) re-introduced hotly-contested legislation Monday that would allow judges to modify the terms of distressed mortgages on primary residences in bankruptcy cases — and this time, sources suggest the legislation faces good odds of passing. Durbin’s bill was introduced in what is expected to be a brief lame-duck session of Congress, convened to address the auto industry bailout and economic stimulus measures, according to a Reuters report. But it likely won’t be made into law until sometime in 2009, sources say. Democrats, including Durbin in particular, have long advocated allowing judges to modify principal amounts of mortgages on primary residences in Chapter 13 bankruptcy cases filed by debtors; currently, such modifications are precluded by law. In contrast, Republicans and most industry groups have strongly opposed so-called ‘debt cram-down’ proposals for mortgages, saying that allowing cram-downs would add to the costs of a mortgage for most consumers and swell the ranks of borrowers filing for bankruptcy protection. Senate Democrats tried and failed to get cram-down provisions included in the Housing and Economic Recovery Act of 2008 during July; and they tried again in the recent negotiations surrounding the creation of the Troubled Asset Relief Program. President-elect Barack Obama, however, has said repeatedly that his administration will make passing cram-down legislation a priority when he takes office in January. In a statement released by Durbin’s office late Monday, the Senator signaled that his proposed bill wasn’t likely to be passed in the current Congress. “In many ways, today’s legislation is a marker for future action,” Durbin said. “The debate on how to help stabilize the financial sector will continue into the 111th Congress, and I intend to continue to fight for homeowners and taxpayers.” But a lobbyist on Capitol Hill said that the bill faces very good odds of becoming law sometime in 2009. “This is a priority for the Barack Obama administration,” said the source, who asked not to be named. Durbin’s bill also would force servicers to restructure any loan that qualifies under the criteria established for HUD’s Hope for Homeowners mortgage program. The current law merely makes H4H an option in loss mitigation, and earlier reports from HW have highlighted a slow start from the program. It would also require modifications to any loan managed by the government, as is the case at IndyMac Federal Bank, which is currently managed by the Federal Deposit Insurance Corp. “Virtually every economist agrees that the financial crisis will not diminish, and the economy will not begin to recover, until we address the root cause of the problem: the failed mortgage market,” Durbin said. “We also have an obligation to make sure that taxpayer money is spent responsibly and that the American people see a return on this investment.” Beyond his proposed legislation, Durbin also said he would chair a Senate Judiciary Committee hearing Wednesday on the role bankruptcy courts can play in easing the ongoing and worsening housing crisis. Write to Kelly Curran at

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