SENATE DEMOCRATS LOOK TO REVIVE CRAMDOWN PROPOSAL

As the foreclosure rate continues to climb, Senate Democrats are taking a second look at a failed proposal to allow the modification of troubled borrowers' mortgages in chapter 13, Dow Jones Daily Bankruptcy Review reported today. At the hearing before the Senate Judiciary Subcommittee on Administrative Oversight and the Courts today, Sen. Richard Durbin (D-Ill.) called on the Senate to adopt the proposal he's been championing since 2007 that was defeated in the Spring of 2008 and then in the Senate earlier this year: allowing bankruptcy judges the power to cram down the mortgages of homeowners in chapter 13 bankruptcy. Subcommittee Chairman Sheldon Whitehouse (D-R.I.) warned that failing to allow cramdowns this time around would exacerbate the economic downturn. Yet opponents of cramdowns, including Ranking Member Sen. Jeff Sessions (R-Ala.), argued that allowing cramdowns would create troubling consequences both for lenders and for future borrowers. ABI Resident Scholar Prof. Adam Levitin of Georgetown University Law countered that lenders wouldn't punish borrowers with higher prices as long as cramdowns didn't cause them to lose more than they would in a foreclosure. However, this isn't possible, he said, because bankruptcy law requires that creditors recover at least the same amount of their claims in a bankruptcy as they would in a liquidation or foreclosure. Mark A. Calabria, director of financial regulation studies at the Cato Institute, said such efforts wrongly assume that the foreclosure crisis was caused by predatory lending practices that created so many subprime borrowers. Rather, he claims that the crisis was actually caused by the combination of falling home values and what he called "negative income shock," including job losses.

As all my loyal readers know, I am a big fan of mortgage cramdown legislation, as it allows owner occupied real estate to be maintained by the homeowner. While this creates a short term loss for the banks, it forces them to have their books reflect reality. Good Senator Durbin! Let's get this done.

Portions of this post were contributed by David Asmus, Esq. from the Hinshaw & Culbertson, St. Louis Office.

Mortgage Cram Down Legislation-Rejection of something that really would have helped consumers.

This blog is primarily devoted to bankruptcy issues as they face business; however, the rejection of the mortgage cram down legislation is something that bothers me--both as a bankruptcy lawyer and someone who is politically aware. The reality is that businesses have the right to strip liens on their assets in a Chapter 11. Why shouldn't consumers be able to do the same thing. Moreover, as a practical matter, this legislation would have a positive impact on banks, as it would keep more consumers in their homes. Think of it, unless there are some unique circumstances, people are not going to keep their homes unless it is worth more than the amount of their mortgage. The legislation would have only allowed a forced reduction of the mortgage to the exact value, so homeowners wouldn't be getting a windfall. But homeowners would have incentive to stay in their homes. This is the goal of a number of government programs, but they have, not surprisingly, not been properly managed. The banks have cried foul, as no doubt, some actuary has reported this will damage their profits, but these are the same actuaries who told them they were protected with credit default swaps. The 1978 Bankruptcy Codes stated goal was to "give the honest but unfortunate debtor a fresh start." No kidding, that was what the legislatures who wrote the bill stated. Humane, well written, and operating almost perfectly for 25 years, until the banks (the same banks that now need trillion of dollars of taxpayer dollars) re-wrote the bill in 2005. Let's take back the dignity that bill provided. Mortgage cram down legislation is a great start! Get it done!