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Cramdown Poised For A Comeback?

Earlier this year, the House of Representatives passed a bill that would allow bankruptcy judges to modify the terms of loans on primary residences, the same way they can on secondary residences or yachts (no, really). The “cramdown” provision, seen by many liberal economists as the only way to deal with the foreclosure crisis, then ran aground in the Senate, as 12 Democrats voted against the measure. This inspired Dick Durbin’s infamous rant on the Senate floor, where he lit into the Senate for allowing the banks to “own the place.”

One other argument that I think takes the cake: “Senator, you understand the moral hazard here. People have to be held responsible for their wrongdoing. If you make a mistake, darn it, you’ve gotta pay the price. That’s what America is all about.” Really, Mr. Banker on Wall Street? That’s what America is all about? What price did Wall Street pay for their miserable decisions creating rotten portfolios, destroying the credit of America and its businesses? Oh, they paid a pretty heavy price. Hundreds of billions of dollars of taxpayer’s money sent to them to bail them out, to put them back in business, even to fund executive bonuses for those guilty of mismanaging. Moral hazard, huh? How can they argue that with a straight face? […]

We want America to be strong, but if it’s going to be strong, you should be respectful, Mr. Banker, of the people who live in the communities where your banks are located. You should be respectful of those families who are doing their best to make ends meet in the toughest recession that they’ve ever seen. You should be respectful of the people that you want to sign up for checking accounts and savings accounts, and make sure that they have decent neighborhoods to live in. Show a little loyalty to this great nation instead of just your bottom line when it comes to profitability. Take a little consideration of what it takes to make America strong…

I’ll offer this Durbin amendment as I did last year. When I offered it last year, they said, “Not a big problem, only two million foreclosures coming up.” They were wrong. It turned out to be eight million. And if the bankers prevail today, and we can’t get something through conference committee to deal with this issue, I’ll be back. I’m not going to quit on this […] At some point, the Senators in this chamber will decide, the bankers shouldn’t write the agenda in the United States Senate.

It looks like Durbin may get his opportunity sooner than expected. The House of Representatives will start consideration of the financial regulation bill today, and nine House Democrats will try to attach cramdown to the bill, led by Reps. John Conyers and Zoe Lofgren. This time, Blue Dog Jim Marshall and even Republican Mike Turner (OH) are on board as co-sponsors, and as the foreclosure crisis shows little sign of improvement, perhaps the prospects for passing cramdown will improve as well. Here’s some of Conyers’ statement:

“Over the past 3 years, millions of Americans have lost their homes through foreclosure and millions more are at risk of losing their homes. Relying solely on taxpayer-financed incentives to encourage the lending industry to voluntarily resolve our Nation’s foreclosure crisis has proven to be woefully inadequate.

Thankfully there is an answer. Today, several of my colleagues and I have introduced an amendment to H.R. 4173, the “Wall Street Reform and Consumer Protection Act of 2009 ,” that will give American families facing foreclosure a critical lifeline by which to save their homes. Our amendment – which won’t cost taxpayers a single penny – will allow a homeowner under the supervision of a bankruptcy judge to extend a mortgage’s repayment term; reduce excessive high interest rates and exorbitant hidden fees; and, under certain limited circumstances, allow the principal amount of the mortgage to be adjusted to the home’s fair market value.

Our amendment rectifies an anomaly in current law that allows virtually every other type of secured obligation to be modified, except for home mortgages. Most importantly, my amendment will help stop the endless cycle of foreclosures that lead to abandoned homes in communities across our Nation and that, in turn, cause neighborhood property values and tax revenues to further decline. I am hopeful that passing this amendment will send the signal that the House feels strongly that this provision must be passed into law to help resolve the ongoing mortgage crisis.”

The bottom line is that the Administration’s mortgage modification programs haven’t worked. As Conyers said, the terms of virtually every other thing of value can be modified by a bankruptcy judge, except a primary home mortgage, and this disempowers those borrowers who have no tools to fight the lenders on a level playing field. Ultimately, public policy should edge toward keeping people in homes rather than the converse – foreclosures cost roughly $250,000 a piece to the overall economy.

The question is whether this cramdown amendment will make it out of the Rules Committee and onto the House floor. CQ notes that it’s one of the 65 amendments to the financial regulations bill. However, Barney Frank said yesterday that there would be three two days of amendments, so it’s possible several of them could be included. Cramdown has already passed the House once, and given that the audit the Fed bill and other decent pieces like the Consumer Financial Protection Agency and leverage limits made it out of the relatively moderate Financial Services Committee, it should be able to pass again.

Other interesting amendments include Maurice Hinchey’s bill to reinstitute Glass-Steagall regulations which would split commercial and investment banking, and Paul Kanjorski’s amendment that would remove the gutting of Sarbanes-Oxley reporting requirements that appears in the bill.

Stay tuned, Dick Durbin, you might get to see if the banks still own the place…

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David Dayen

David Dayen