March 4, 2009
New Cramdown Bill Negotiations
By Jessica Holzer
Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- Borrowers would be required to consider offers by their lenders of "qualified" loan modifications before they could have their mortgage debts reduced in bankruptcy court, under a compromise on mortgage "cramdown" legislation reached by U.S. House lawmakers.
Bankruptcy judges would also have leeway to slash interest rates for borrowers to as low as 2% in lieu of a reducing the principal balance of their mortgage, according to a draft of the compromise language obtained by Dow Jones Newswires. Under current law, bankruptcy judges cannot reduce interest rates below market rates.
The changes represent the latest concession to the banking industry over legislation that would give borrowers substantially more leverage in their negotiations with creditors. They come after Democratic leaders last week delayed a vote on the legislation after support among centrists in their ranks began to erode.
The measure is a central plank of the Obama Administration's strategy to right the housing market. Proponents say it will act like a cudgel, encouraging mortgage companies to take advantage of government-backed financial incentives to modify loans.
Under the legislation, bankruptcy judges would be able to reduce the principal amount of mortgage loans for struggling borrowers - a process dubbed "cramdown."
The banking industry warns such a move will raise borrowing costs for all homeowners and clog the bankruptcy courts, prompting judges to write off tons of other consumer debt just when lenders are reeling from the financial crisis.
Earlier Tuesday, House Majority Leader Steny Hoyer, D-Md., cast the negotiations as aimed at ensuring that Chapter 13 bankruptcy is a last resort for borrowers after efforts at a voluntary loan modification had failed.
In order to avoid a cramdown, lenders would have to offer borrowers a loan modification that conformed with the modification guidelines set forth in the Obama housing plan. Specifically, lenders would have to cut mortgage payments to no more than 31% of a borrower's income.
The borrower would be required to consider any offers of such "qualified" loan modifications before receiving a court-ordered modification.
Under the compromise language, judges may also consider reducing the interest rate to as low as 2% instead of slashing the loan's principal balance, as long as the new mortgage payment doesn't exceed 31% of the borrower's income.
The changes don't go far enough to appease the banking industry, which has been lobbying furiously against the bill.
"It doesn't make bankruptcy the last resort. It allows borrowers to decide between bankruptcy and the administration's loan modification plan," Financial Services Roundtable Senior Vice President Scott Talbott said.
-By Jessica Holzer, Dow Jones Newswires; 202-862-9228; [email protected]
(Patrick Yoest contributed to this report.)
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