WASHINGTON-Efforts to allow distressed homeowners to restructure their mortgages in bankruptcy court were gaining momentum last week after the nation's largest bank, Citicorp, agreed to support a bill moving through the Senate.
Despite the Citicorp deal, the banking and credit union lobbies remain adamantly opposed to the so-called "cramdown provision," saying they shouldn't be victimized by bad loan decisions made by homeowners. In addition, they say allowing the bankruptcy judges to restructure mortgages will wreak havoc on the secondary loan market.
The opposition by the financial services lobby helped stop a bid to forward cramdowns in last year's Congress, but the worsening foreclosure crisis has made it a good bet the measure will pass this year.
Under a cramdown, a bankruptcy judge would be authorized to forcefully lower the value of a home loan by reducing the principal and/or interest and altering the payment schedule.
The credit union groups remain opposed to the cramdown provision.
"Why should lenders that didn't cause the (subprime) problem be left holding the bag?" said Ryan Donovan, senior lobbyist for CUNA.
The American Bankers Association said it is not a party to the Citicorp deal, even though the banking giant remains it's largest and most influential member. "The ABA is opposed to the agreement because it will leave in place overly broad mortgage cramdown authority and other provisions that will harm thousands of banks across the country that have made, and continue to make, good loans," said Floyd Stoner, chief lobbyist for the banking group.
But CUNA's Donovan acknowledged the Citi deal will give momentum to the provision, which is supported by leaders in both the Democrat-controlled House and Senate. In addition, he said the cramdown provision is likely to be included in an economic stimulus package that Congress is expected to pass as soon as possible. At this point, he suggested, the credit union lobby's best bet may be to convince lawmakers to limit the scope of which mortgages are covered and what the bankruptcy judge can do.
NAFCU, which helped draft a narrow cramdown provision last year that would have applied to just subprime and other nontraditional mortgages, said it continues to oppose the bill, despite the Citi deal. "Last time I checked, Citi didn't have a vote in the U.S. Senate," said Dan Berger, chief NAFCU lobbyist.
The deal between Citi and Senate leaders would allow judges to reduce principal, lower interest rates, extend the term of the loan or any combination of the three. The cramdown would be limited to loans written prior to the bill's date of enactment. Borrowers would have to give their lender 10 days notice before filing for bankruptcy to give the lender time to try to work out a modification.
