New Bill Allows Judges to Cram Down Mortgages
Monday, March 30, 2009
Congressional Democrats are trying to pass a bill to keep more California residents in their homes. But opponents -- including many Republicans and the banking industry -- say the legislation will raise the cost of homes. Matt Laslo reports.
California continues to be battered by foreclosures. It's projected nearly 500,000 families in the state will lose their homes in 2009.
"When you have so many homes in areas that are in foreclosure, and the whole are drops in value, there is tremendous jeopardy there. And that's what we face in many areas of my state," says Democratic Senator Dianne Feinstein.
Home prices are down 36 percent in the San Diego area, according to the Center for Responsible Lending. The Obama administration has diverted $75 billion to keep people out of foreclosure. But Democrats say more is needed. They want to give bankruptcy judges the power to modify mortgages. The House already passed it, but Senate Republicans are holding it up.
Republican Brian Bilbray opposed the bill in the House.
"We don't want to basically shut off the future home loans that are going to help us get out of this. And if you create a situation where there is a lack of incentive for people to loan their money to somebody for buying their homes, we're gonna have major problems," Bilbray says.
The foreclosure bill is referred to as "Cram-Down" because it gives bankruptcy judges the power to cut the cost of a mortgage - or to cram it down. Francis Creighton is a lobbyist for the Mortgage Bankers Association. He says the bill is not needed because lenders are already doing what they can to keep people in their homes.
"Bankruptcy is not something that benefits consumers - it certainly doesn't benefit lenders. The only people who benefit in a bankruptcy proceeding are the bankruptcy attorneys," Creighton says.
Creighton also says if banks know a judge can slash the price of a mortgage they will just increase the cost of loans. "We believe that is going to drive up costs for consumers. Higher down payments. Increased fees. Increased interest rates," he says.
But there is a strong populist feeling in Congress that the banks are a part of the problem. San Diego Democrat Bob Filner voted in favor of the legislation in the House. He says he isn't buying banks' arguments on the cram down bill.
"You know we've been listening to the banking lobby through this whole crisis, we've been giving the banks money, we've been showering them with money, so I don't take their opposition very seriously, because everything they've proposed has failed. So, lets try something else," Filner says.
Even with the billions of dollars the government has given banks, lawmakers say they aren't doing enough to keep people in their homes. Filner says homeowners need a leg up on lenders.
"The average person does not have very many weapons to fight back either the big banks or the economic system that they are struggling under, so this gives them the tools to fight back. And clearly the people who hold all the tools don't want to lose any," Filner says.
Congress did include a $7,500 tax credit in the stimulus bill. But Republicans, like Bilbray, say Congress limited the effectiveness of the tax break by making it only for first time home buyers. Bilbray says that automatically blocks people who were forced to foreclose from government aid.
"So we need to eliminate the conditions of who gets the tax credit, so that we encourage everybody to get in there and stimulate the housing market, rather than a select few we decide should be a winner as opposed to anyone else," Bilbray says.
Senator Feinstein says the cram down bill will do just that, level the playing field.
"The key is to see that families who are not inappropriately in the house - by that I mean didn't exaggerate their wages, but have loans that reset and find themselves in circumstances that they can't now meet have some opportunity to save their home," Feinstein says.
Right now the bill doesn't have enough support, so senate leaders have put it on hold until later in April as they negotiate changes. While the bill could ultimately save some Californians from foreclosure - for many it could come too late.
From Capitol News Connection in Washington, I'm Matt Laslo FOR KPBS News.