Is the Senate close to a breakthrough on new bankruptcy help for homeowners?

April 21st, 2009 by Mike Hinshaw

durbinDiana Olick, of cnbc.com’s “Realty Check” still hates the idea of so-called “cram-down” legislation but reports that the Senate version may be “imminent.”

Let’s hope so–the law would be an efficient method to clear up the mess caused by the derivative-based mortgages that has the world’s head spinning and massive numbers of U.S. homeowners heading to bankruptcy court for protection. For example, San Diego bankruptcy filings are up nearly 80 per cent from 2007.

In her April 20 “Realty Check” column, Olick leads off with this: “Despite the fact that the press representative in Senator Dick Durbin’s (D-IL) office tells me ‘negotiations are still underway,’ several outlets are reporting that the Senate version of the so-called bankruptcy ‘cramdown’ bill is imminent. The house passed legislation in March allowing bankruptcy judges to modify home loans, with a couple of caveats, the main one being that the borrower had to have exhausted all possibilities for modification with his/her lender.”

UPI supports Olick’s account, at least partially; in an April 18 posting, UPI traces the optimism for passage to financial “industry sources” who “told the Washington publication The Hill Friday that backers of the so-called cramdown legislation — which seeks to aid homeowners who owe more on their homes than their market value — are looking to overcome vociferous opposition from the banking industry and have a measure ready for a vote by Tuesday,” which would have been April 21.

The House bill, described here, was passed March 5, 234-91 and would allow bankruptcy judges to do what they already can with such luxuries as vacation homes, snowmobiles and even yachts–namely, modify the terms of the loan. Since 1979, these judges have had their hands tied via legislation prompted by mortgage lending lobby.

Not surprising to anyone who follows Olick, she also says, “Now we’ve already discussed ad nauseam the main argument against the idea, which is that it would throw into question the value of all mortgages, and therefore raise the cost of a mortgage for everyone else.”

Where she gets such ideas is anybody’s guess. The mortgage lending lobby, again? Regardless, the House version contained language limiting the judges’ powers such that new mortgages would not be subject to the so-called “cram-down.” Presumably, the Senate version would be at least as restrictive.

However, she also points out that it’s a bad idea to judge the president’s programs too early: “The administration’s Making Homes Affordable program is well underway, with banks supposedly doing their all to modify home loans by reducing monthly payments under a certain formula. Let me emphasize that the program is barely a month old, so it may not be fair to judge it on its merits just yet.”

But then, with ear-to-ground and finger-on-pulse sagacity, Olick gives us her verison of an insider’s view: “Banks/servicers are overwhelmed, borrowers are getting the serious run around, investors are mounting new offensives over who will take the losses on these modified loans, and many borrowers who are getting through to the right lines are being turned down. If judges are allowed to modify loans, then investors would likely take all the losses because they’d have no legal recourse against servicers for breaking any contracts. Servicers would be following judicial orders.”

Regardless, Durbin’s office is sticking to its story that no breakthrough is imminent: “We don’t have a deal, and there is not a deadline,” Durbin spokesman Max Gleischman told UPI.

As for the confusion, well–who knew? Kidding aside, anyone who’s contemplating bankruptcy or who has been trying to get help from their loan servicers is all too aware of what it’s like trying to make contact, much less get a straight answer. That’s because of the nature of these derivative-driven, pooled-and-tranched financial instruments–they’re often promulgated as trusts, administered by loan servicers who can make more money if a property goes into foreclosure than they can if it doesn’t. Plus, as the law now stands, they can be sued by investors (as Olick alludes) if they help a homeowner with new terms. That’s explained here.

In San Diego, even more overwhelm-ed-ness is being reported, but not from a variety of sources. In a brief for the San Diego Business Journal, Heather Chambers says, “The sheer volume of bankruptcy filings in San Diego County by individuals and businesses has reached levels unseen since 1999, county and city officials said last week.

“Aside from an unusually high number of bankruptcies filed in 2005, before a major change in the law made it more difficult to file for personal bankruptcy, there hasn’t been a busier time for bankruptcy.”

Chambers says more than 13,000 “local debtors” filed for either Chapter 7 or Chapter 13 protection, “up 78 percent over 2007.”

What continues to buck the norm–at least as projected by the credit-card industry-driven “reform” of 2005–is the number of Chapter 7 filings. Credit card companies pushed the reform as a way to stop what they viewed as abuse of the bankruptcy code by forcing more filers toward the Chapter 13 queue because Chapter 13 requires debt repayment (even if it’s lowered amounts) over three to five years.

Yet, Chambers says Chapter 7 filings have increased 91 per cent from 2007 levels, while Chapter 13 filings are up 30 per cent in the same period.

Perhaps Senator Durbin is sandbagging for a reason and The Hill’s sources are right: if so, maybe the reluctant Senate will soon do the right thing and follow the House’s example. U.S. homeowners surely need the legislation if lenders won’t come to the table with realistic offers.