WASHINGTON -
The measure, partly crafted by NAFCU, would carve out large exemptions to limit its effect on credit unions.
Like other measures moving through Congress, the main target of the bill is subprime and so-called non-traditional mortgages, which grew in popularity during the real estate boom. The credit union lobby continues to make its case that credit unions made few of the so-called exploding mortgages–those that reset at significantly higher rates and charge penalties for prepayment–so should not be subject to some of the solutions being considered by Congress.
The aim of the bill is to help hundreds of thousands of homeowners whose mortgages are scheduled to reset to and allow them to restructure their mortgages under Chapter 13. Under current bankruptcy laws, judges may amend the terms of most consumer credit, but not mortgages for principal residences. The bill passed by the Judiciary Committee would empower the bankruptcy court judges to reset the rates lower, extend the term of the mortgages or “cram down” the outstanding value of the loan to the fair market value of the home.
The bill would apply to subprime mortgages, defined as those with rates at least 3% above the comparable Treasury product; non-traditional loans, including interest-only and negative amortization mortgages; mortgages made after Jan. 1, 2000 and not to future loans; and would terminate after seven years.
“This gets at those borrowers who really need the help,” said Brad Thaler, senior lobbyist for NAFCU, who helped craft the compromise proposal. “The bill may not be perfect for everybody, but we think it’s a workable solution,” Thaler added, estimating it would exempt more than 95% of all credit union mortgages.
CUNA balked at the compromise, saying it is worried that too many credit unions have an exposure to interest-only and other non-traditional mortgages, thereby creating potential havoc if these borrowers file to reorganize through the bankruptcy courts. According to CUNA, 460 credit unions have some non-traditional loans on their books and 108 credit unions have non-traditional mortgages that account for at least 10% of their first mortgage loans.
“We could not support the bill as it is, because the definition of non-traditional loans is still in it, despite our suggestions,” said Ryan Donovan, senior CUNA lobbyist.
But representatives from some consumer groups said even though some credit unions in certain markets may have large amounts of non-traditional mortgages, exposure by the entire credit union industry is still small–less than 1% of all assets. And even a small portion of those loans would be expected to go into bankruptcy for restructuring, making the expected impact on credit unions negligible.
Representatives from both credit union lobby groups, who are working separately on the bill, said they will continue to work with lawmakers to exempt interest-only loans from the bill.
Both groups would rather not have the bill at all, because of any impact it would have on credit unions. But if Congress does pass the bill, their aim is to minimize its effect on credit unions.
Prospects for final passage of the bill are clouded. First, all but one Republican on the Judiciary Committee voted against it, indicating there is little support among the House minority when the bill goes for a vote by the full House. Similar sentiments also lie in the Senate, which is considering similar legislation sponsored by Democrat Richard Durbin of Illinois.
In addition, timing on the bill is critical. That’s because as many as two million ARMs are set to adjust to significantly higher rates over the next 18 months, so supporters of the measure hope to get the bill finalized by early next year to provide relief for as many as those borrowers as possible.
