Until this week, “cramdown” for a family’s primary residence -- that is, a provision to allow judges to change the terms of a mortgage -- was a non-starter on Capitol Hill.
Opponents said that forcing lenders to lower principal or interest rates on a family’s No. 1 home would increase interest and shift costs to more responsible borrowers.
This week, against robust opposition from finance industry lobbyists, the House voted 234-191 to give primary homeowners the bankruptcy option to alter the terms of loans that has long existed for second homes, vacation homes, or investment property.
Judges would have a range of options
The bill requires bankruptcy judges to consider a range of options currently unavailable to them. These include: Lowering the interest rate on a troubled mortgage to as low as 2 percent and reducing mortgage payments to no more than 31 percent of a borrower’s income.
If these changes don’t make mortgage payments feasible, a judge can then consider lowering the principal owed on a loan.
The proposed law also requires homeowners to demonstrate that they have used available options to modify loans with lenders on their own, including the Obama administration’s voluntary refinancing program.
If homeowners subsequently sell their home for a profit, mortgage lenders can recover some of those funds to compensate them for cramdown on the loan’s principal.
The vote came after an intense week of negotiations between House Speaker Nancy Pelosi and an increasingly assertive coalition of centrist and conservative Democrats who wanted assurances that borrowers were acting responsibly.
“Many of the suggestions made were very positive and constructive,” said Speaker Pelosi at a press briefing on Thursday, before the vote. “They weren’t necessarily there to win votes. But they are better -- they made better policy." Democratic leaders lost 24 members of their caucus on the vote and picked up seven Republican votes.
The House bill also mandates that the Government Accountability Office studies the effectiveness of judicial mortgage modifications, including the impact on bankruptcy courts.
Not all homeowners are covered
Wary of a bailout backlash from voters, House leaders revised the bill to deny relief to borrowers who can afford to repay their loans without modifications mandated by a court.
Republicans proposed going further. They offered an alternative bill to bar relief or assistance to homeowners who lied on mortgage applications or failed to follow underwriting standards. That failed 182-242.
Rep. Tom Price (R) of Georgia also proposed an amendment that provided that mortgage lenders can recapture the full amount of principal lost in a mortgage modification, if homeowners later sell the home at a profit. That amendment narrowly failed 211 to 218.
“Members of Congress don’t understand the negative implications of what they voted for,” said Rep. Joe Wilson (R) of South Carolina, after the vote. “Cramdown, which could change the principal, interest, length of payments, interferes with the financial markets." That means that people who are responsible will have to pay higher interest costs -- shifting the cost from people who have been greedy or were taking risks they shouldn’t have taken.
The bill faces an uphill fight in the Senate, where Republicans are raising similar concerns to those raised in the House.
“It will cause interest rates to go up and will make it more difficult for people to get a mortgage,” says Sen. Charles Grassley (R) of Iowa, the top Republican on the Senate Finance Committee. “But it’s now a Democratic Congress,” he adds, suggesting that this time, cramdown provisions may make it to the president’s desk.