Bankruptcy Mortgage Cramdown Soundly Defeated in Senate Vote

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

The bankruptcy mortgage cramdown amendment was defeated in the Senate on Thursday afternoon by a margin of 45 - 51 (with three Senators not voting), a wide margin considering the 60 votes needed for cloture. Every Republican voted against it, not a surprise, but so did 12 Democrats, including Senator Arlen Specter who switched parties just days ago. Although the defeat was almost universally expected, the margin of the loss and the number of Democrats in the "nay" column must be disheartening for Senator Durbin. He admitted: "I had hoped for a better vote." Although he vowed to try to insert the bankruptcy provision in an anticipated conference with the House, such a provision having passed in the House in early March, the relatively large margin of the loss in the Senate makes his success there quite unlikely.

The Roll Call

The Democrats who had been on the fence and voted for the amendment include Sen. Evan Bayh of Indiana, Mark Warner and Jim Webb of Virginia, Claire McCaskill of Missouri, and Ted Kaufman of Delaware. Votes against were cast by Democrats Tom Carper of Delaware, Robert Byrd of West Virginia, Max Baucus and Jon Tester of Montana, Mary Landrieu of Louisiana, Ben Nelson of Nebraska, Blanche Lincoln and Mark Pryor of Arkansas, Michael Bennett of Colorado, Tim Johnson of South Dakota, and Byron Dorgan of North Dakota, as well as Arlen Specter.

Key Reasons for the Defeat

From watching the legislative developments closely since the House and Senate bills were introduced during the first week of this session of Congress, I believe the bill was defeated for two fundamental reasons: 1) the opponents largely succeeded in framing the debate on their terms; 2) President Obama and his Administration did not risk virtually any political capital on this fight.

Framing the Debate

The financial industry succeeded in convincing enough Senators that preventing hundreds of thousands of foreclosures was not worth risking having mortgage rates go up for everyone. This argument succeeded in spite of the lack of credible evidence of this purported cause and effect, indeed in the face of substantial indications to the contrary. And it succeeded in spite of changes in the original legislation designed to further mitigate any such purported tendency, such as its restriction to mortgages entered into before enactment and adding a sunset clause.

The argument played into and arguably even fanned the popular feelings of righteous indignation of "responsible" homeowners against supposedly "irresponsible" ones. Regardless of how convincing this was, it gave political cover to some Senators. For example, Democratic Sen. Ben Nelson justified his "nay" vote with: "Do I want to have my rate go up so that somebody else might be able to cram down" their mortgage payment?

The financial industry's message resonated in the media with the general fears about the instability of the economy. This resulted in reputable news organization such as the Associated Press mouthing that message with statements such as: "The forced easing, or 'cram-down,' of a mortgage by a bankruptcy judge would have likely introduced additional uncertainty for investors." Such arguments were found credible in spite of the appropriate current popular and Congressional distrust of this industry.

White House Missing from the Debate

For reasons not yet clear, neither President Obama nor virtually any senior members of his Administration provided strong support in the legislative effort in the Senate, indeed even undercutting that effort when it was most needed. Back in mid-February when Obama proposed his "Homeowner Affordability and Stability Plan with barely a mention of bankruptcy cramdown, I speculated that the legislation was "perhaps soft-pedaled because it is controversial." After the House passed its amended bill in early March, in spite of the clear need for help for the tougher Senate battle the Administration issued no statements of support, and seemed to pay no attention as the negotiations kept faltering. And last week, just when an enthusiastic endorsement could well have provided a needed push for the undecided Senators, Treasury Secretary Timothy Geithner instead guardedly said: "We are supportive of carefully designed changes” to bankruptcy law. . . . .“It’s a difficult balance to get right, as you know.” "But the president is supportive of this.” Hardly a ringing endorsement from the Administration's bully pulpit. Even after the vote, there has been no comment from either the Treasury Department or the White House. At some point it seems that a decision was made that in the grand scheme of things, this legislation, at least at this time, was expendable.

Financial Influence from the Financial Sector

And then there is always the issue of campaign money. According to the Center for Responsive Politics, banking and real estate interests have given about $2 million to Sen. Mary Landrieu's campaigns, about $2.6 million to Sen. Ben Nelson's, $1.3 million to Sen. Blanche Lincoln's, $2.5 million to Sen. Johnson's, and $3.5 to Sen. Max Baucus'. Oh, and more than $4.5 million to the new Democrat Sen. Arlen Specter's campaigns. Perhaps the most revealing comment in this respect after the vote was by the Delaware Sen. Ted Kaufman, a state with a very significant financial industry, who is not running for reelection: "I'm liberated from fundraising." He voted for the amendment.

Please return to this website tomorrow morning for a Bulletin on the prospects for this legislation going forward notwithstanding this Senate vote.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Will Senator Arlen Specter's Party Switch Affect the Senate Vote on the Bankruptcy Mortgage Cramdown Legislation?

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com


With a Senate floor vote anticipated today on the bankruptcy cramdown amendment, and seemingly everything riding on whether it has the support to garner the filibuster-proof 60 votes, does Sen. Arlen Specter's defection from the Republican party improve its chances? There's a small possibility that it does . . . but probably not, at least not today.

Arlen Specter's Position
Sen. Specter has long been in the middle of the cramdown debate as the potential deal-maker for a long time, as he is now. So there are many clues about his position.

Way back in October 2007, Sen. Specter and Sen. Dick Durbin, the sponsor and steadfast advocate of the current Senate bill, introduced separate bankruptcy cramdown bills and were in direct talks to try to forge a bi-partisan compromise. Specter's bill gave mortgage lenders the right to reject any to changes to the loan terms, giving some indication of how relatively modest his own ideas were on cramdown, at least at that time. Indeed, he expressly argued against allowing bankruptcy judges to modify mortgages without lender approval, asserting that lenders would not be willing to lend if "we meddle with the principal sums." He clearly indicated that he was at the very least very cautious about the cramdown concept.

So how much has Specter's perspective shifted as the foreclosure situation has tremendously worsened in the year and a half since then? As reported in a previous Bulletin here, "Republican [Sen.] Arlen Specter of Pennsylvania has long been a potential supporter, but apparently of only a narrower version, so Democratic Sen. Evan Bayh of Indiana and he are working on a proposal limiting cramdown only to subprime mortgages." There are no indications that the version to be voted on today will be so limited, and if not this seems to indicate that Specter will not be voting in favor of it.

Specter's Role in the Negotiations
According to a very recent story in BusinessWeek.com:

Early on in Senate negotiations over the bill, Specter was one of a handful of moderate Republicans taking part. Since then, the talks have shrunk to several key Democrats. But a Senate staffer close to the talks says the Republicans—or former Republican, in Specter's case—remain key to actually getting to the 60 votes supporters will need.

This same Senate staffer's comment: ""He's the kind of guy where you never know."

Specter's Change in Party Affecting His Prior Positions
According to the same BusinessWeek.com article: " The measure's supporters hope Specter will have to worry less about the GOP base when considering the topic, but that's not a given. "

According to Specter himself, as he concluded in his statement announcing his party change:

My change in party affiliation does not mean that I will be a party-line voter any more for the Democrats that I have been for the Republicans. . . . I will not be an automatic 60th vote for cloture.
. . . .
Whatever my party affiliation, I will continue to be guided by President Kennedy’s statement that sometimes Party asks too much. When it does, I will continue my independent voting and follow my conscience on what I think is best for Pennsylvania and America.

Although he was speaking here in platitudes, Specter has a well-deserved reputation as an independent thinker. So his change in party affiliation does not seem likely to affect his vote on this bill. Indeed, he may well use this early opportunity to assert his independence from his new party.

Remaining Unknowns
First, even up to the last hours before today's anticipated vote, there is talk of a possible new compromise, one which conceivably could entice Specter's vote. How much that talk is mere posturing is difficult to discern. Indications are that any last-moment breakthrough are a very long shot.

Second, there has been some indication that if today's floor vote is unsuccessful, the measure will still not be dead. With Specter's party switch, there are 57 Democrats in the Senate, and two independents who caucus with them. With the Minnesota election between Al Franken and Norm Coleman still in litigation, the Democrats are now effectively one vote short of the critical 60-vote for cloture. The Minnesota Supreme Court has recently agreed to hear Coleman's election appeal on June 1, meaning that the election there could be decided, according to political observers, as early as mid-June. This extra margin may become critical if the cramdown bill, in whatever amended form, re-emerged after Franken's anticipated arrival.
Finally, and perhaps most importantly, if home foreclosures continue at the present pace, stalling the economic recovery and even further devastating major regions of the country, political pressure will continue to build to address this more assertively.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that the writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

The Insider's Story on Bankruptcy Cramdown: Senator Durbin's Perspective

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Negotiations on the Chapter 13 mortgage cramdown bill are reportedly still continuing, so the terms of the compromise bill have not yet been finalized, even as it poised for a Senate floor likely this Thursday. Therefore it is impossible to count votes and attempt to predict the outcome, although virtually all sources are expressing doubt that it will pass. The proponents --primarily Senator Dick Durbin and his aides--continue to say publicly that they still hope to strike a compromise with creditors that will convince a few more key Senators to support the legislation.

Although some negotiation apparently continues, the bill's terms directly related to the mortgage cramdown itself may well by now be firm, since the latest indications are that the focus has now turned to other issues within the broader mortgage legislation. Beyond its terms referred to in my Bulletin of 4/20/09, the bill now requires a homeowner to be two months delinquent. Also, the restriction of the cramdown to loan balances of less than $729,750 (which derives from a FHA conforming loan maximum) continues to be in the bill.

Senator Durbin, the sponsor of the pertinent Senate Bill 61, "The Helping Families Save Their Homes in Bankruptcy Act of 2009," gave a detailed speech yesterday on the Senate floor in support of the cramdown legislation. Although short on details of the bill that will come up for the floor vote, he shed some light on the issue and on the negotiations, from his perspective.

His main themes:

The beneficiaries of the proposed legislation:

When we consider amendments to the bill, the key number to remember is 1.7 million families—1.7 million. That is the number of families we will either give a chance to save their homes or allow them to be thrown out in the street, depending on how the vote turns out.

Refuting the argument that bankruptcy would encourage too many bankruptcies

I don’t want to see more people in bankruptcy. That is not a good outcome. But if the lenders of these mortgages know that at the end of the road, after everything else has gone on, there may be a bankruptcy judge who will sit down and look at that mortgage and say to that flight attendant: You know what. You are offering mortgages at this bank for 4 and 5 percent. You offer this woman 4.5 percent. She can make the payments and keep her home and the court is going to order it.

If they knew that could happen at the end of the day, I think those bankers would be in a position where they would want to sit down before it occurs and try to avoid the foreclosure, avoid the terrible outcome for the family and the neighborhood.

Getting at the heart of the recession:

The Mortgage Bankers Association and their cronies scoffed when we told them we were going to have even more foreclosures, but the number continues to grow. This is the cancer at the heart of this recession. This is what we have to address.

This President has worked overtime with a Recovery and Reinvestment Act, putting money back into the economy, saving jobs, creating jobs. But we have to get to the heart of this housing crisis. We have to stop what has become a steady decline of neighborhoods and real estate values in America. It affects us all.

Durbin's perspective on the financial institutions' perspective:

The banks have said all along we don’t need any change in the law, we will take care of this problem. Look what has happened. As they promised us they would take care of it, they didn’t. More and more homes went into default and face foreclosure because they won’t sit down and make the deal. Why wouldn’t they? If they face $50,000 in losses on these foreclosures, if they have all these new obligations, at the end of the day why wouldn’t they sit down?

I will tell you why. For many of them, they don’t want to concede the fact that they created this crisis. Second, many of them believe that at the end of the day Uncle Sam and the taxpayers of America will ride to the rescue, buying these mortgage securities, taking care of these banks, saving them after the bottom falls out of the real estate market and housing market in America. What an awful outcome, that all these families would have to go through all this suffering, that all these neighborhoods would have all

these problems, so at the end of the day the banks that made the original bad mortgages would be rescued. That must be what they are thinking.

Durbin's anger at the big financial institutions:

The groups that are leading the charge against me on this are familiar names on Capitol Hill: The Mortgage Bankers Association, the people who brought us this wonderful subprime mortgage crisis, they oppose my bill; the Financial Services Roundtable, the biggest names in financial services in this Nation, the ones who have had their hands out for Federal money, oppose this idea of helping people facing foreclosure; and the American Bankers Association. What a disappointment.

. . . .

They say: Don’t worry about it, Senator, we are experts. We are going to handle it. Don’t tell us what we need to do.

. . . .

In effect, they have said we have created these rotten mortgages in the first place. Then we sliced them up into securities and sold them to investors all over the world as though there were no risks involved, although we knew better. They tell us we made billions of profits on the backs of homeowners, and then we took billions more from the taxpayers when the mortgages went bad, but don’t make us solve the crisis.

Supporters of the legislation:

Not everyone has walked away from this responsible solution. The amendment which we will vote on a little later this week has the support of CitiGroup, the Center for Responsible Lending, and many other leading homeowner advocacy groups such as the AARP, the Leadership Council on Civil Rights, the Consumer Federation of America, and dozens of other groups. They have worked with me to craft a responsible, reasonable proposal to give lenders a clear incentive to work hard to keep families in their homes.

Terms of the compromise:

The amendment I am going to offer will make a modest change in the Bankruptcy Code with a lot of conditions. It will not apply across the board. In the past, some of my colleagues have understood the need for action but have been uncomfortable with some of the original language. So let me be clear. This amendment is very different. This amendment limits the assistance in bankruptcy to situations where lenders are so intransigent that they are unwilling to cooperate with the two primary foreclosure prevention efforts already underway, the Obama administration’s Homeowner Assistance and Stability Plan, and the congressionally created HOPE for Homeowners Refinancing Program, which this bill will greatly improve.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

The Latest Clues on Whether the Senate Will Pass the Bankruptcy Mortgage Cramdown

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

With the Senate poised for a floor vote this week on the mortgage cramdown legislation, here are the very latest clues as to whether or not it will pass there.

The Most Recent Negotiations & Tactics

Early in the Congressional Easter Recess which ended a week ago, Senate Majority Leader Harry Reid made a statement that if the cramdown bill did not have the votes for passage, he would be willing to drop it from other housing-related legislation. One intent of this was to put pressure on the negotiators to come up with a compromise during the recess. No deal was reached and negotiations continued last week after Congress returned. No breakthrough was achieved, and instead the news focused on indications of continued dispute--including dueling announcements midweek by the National Association of Federal Credit Unions that it could not support the legislation on the table and by the larger Credit Union National Association arguing that the negotiations were progressing productively. In a news conference on Thursday, April 23, Senator Reid announced that the bill would be brought to the Senate floor for a vote this week. He did not provide details about the cramdown terms or whether it would be packaged with other housing provisions as the successful House bill had been. Negotiations continued over this last weekend.

Standing on Principle vs. Compromising

From my review of countless articles over the past few weeks, the dynamic at play appears to be that the key proponents of the legislation ardently believe that restricting mortgage cramdown to a relatively limited pool of loans--such as subprime or Alt-A ones--would limit its impact so severely as to have it fail in its purpose. At the same time the most ardent opponents--the Mortgage Bankers Association, American Bankers Association, the Financial Services Roundtable--appear to be against mortgage cramdown in any form, and have virtually every Republican Senator in that camp. There are very few Republican Senators, and a few more conservative Democrats, who are somewhat more open to the bankruptcy cramdown concept, state that they are very nervous about the economic impact of a broad applied cramdown, and are only willing to sign on to a restricted version. The votes appear to be sufficient for passage if a restricted version would be put to the Senate floor, but there is no present indication that will be happening.

The Legislative Packaging

Whether the cramdown bill will be packaged with other provisions the credit industry favors will indicate how aggressively the Senate Democratic leadership is willing to push to have the bill pass, and how likely it would pass.

Back during the Easter recess, a Wall Street Journal editorial referred to a bill that banks are hoping for, a huge temporary increase in the FDIC's borrowing authority from the Treasury, which could mitigate an onerous increase in the FDIC's deposit-insurance fee. The editorial said that "[w]e're told that Senate assistant majority leader Dick Durbin is telling banks that if they want that extra credit-line for the FDIC, they'd best sign on to cramdown. A spokesman for Mr. Durbin denies threatening banks, but we also know he refuses to give the FDIC credit increase a stand-alone vote."

The question now is whether the cramdown measure will be part of the package including the FDIC borrowing authority increase, or whether it will be offered as a stand-alone amendment, thus much more easily voted against. The latter would also give Democrats both political cover as to their constituents and talking points for future battles, by enabling them to blame Republicans more directly for the legislation's failure to pass. As an indication of this, in a news conference on April 23 the Democratic leadership, including Senators Dick Durbin and Harry Reid, attacked the Republicans for their purported inflexibility. Thus, more likely the cramdown provisions will not be combined with creditor-attractive legislation but will be voted on directly in a proposed amendment to a broader housing-related bill.

And If It Does Not Pass?

If the cramdown does not survive the Senate floor vote, Sen. Durbin, who has been pushing similar legislation for years, asserts that he would continue trying to pass some version. Who knows whether that is a face-saving comment or is true, and even if true whether the best time for potential passage would have come and gone. However, considering that home foreclosures will almost certainly continue at a heart-breaking pace for months if not several years to come, the public pressure for direct relief through bankruptcy cramdowns will continue.

NOTE:

There have been no committee hearings whatsoever in the Senate, and no formal action on Senate Bill 61 at all since the day Sen. Durbin introduced it on January 6, 2009 at the very beginning of this legislative session. On that same day it was referred to the Judiciary Committee, where nothing further has occurred. Instead the House took the lead, debated an identical and then amended bill in committee and an amended one on the House floor, and passed that amended version in early March.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Bankruptcy Cramdown Headed for Senate Vote Next Week, Likely to Defeat?

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

The Associated Press and Reuters are both reporting as of late afternoon today that Senate Majority Leader Harry Reid has announced that the bankruptcy mortgage cramdown bill is heading for a vote on the Senate floor likely either Wednesday or Thursday of this coming week. The Associated Press story is further stating that the bill is "headed for defeat." The AP story does not state specifically the basis for this prediction, except to cite the statements of two Democratic Senators who are saying they intend to vote against the legislation, Jon Tester of Montana and Ben Nelson of Nebraska.

Throughout this week there have been indications of the intense ongoing negotiations coordinated mostly through Senator Dick Durbin's office, in which he sought creditor industry support primarily from some of the largest banks and from credit union organizations. The goal had been to have a deal in place as a way of persuading all or virtually all Democratic Senators to get behind the bill, along with a handful of Republicans, to reach the filibuster-proof 60 votes. There has been no announcement of such a deal.

Instead the consistent story of the week has been the lack of progress in the negotiations, punctuated by a midweek story that received a great deal of publicity, a statement by the National Association of Federal Credit Unions that it could not support the legislation in the form being negotiated. This produced a public retort by the much larger Credit Union National Association, with its president chiding the rival trade group for no longer participating in the negotiations.

Treasury Secretary Timothy Geithner did not help the cause earlier in the week with his less than enthusiastic endorsement of the legislation: "We are supportive of carefully designed changes” to bankruptcy law, Geithner said. “It’s a difficult balance to get right, as you know,” he continued. “But the president is supportive of this.” He was responding to a question from Elizabeth Warren, chairwoman of the congressional oversight panel on the financial bailout, a friendly audience since she has been a long-time supporter of the bankruptcy mortgage cramdown option.

Please return to this website for developments throughout this upcoming week as the anticipated Senate floor vote approaches.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.


by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

A Busy Senate Easter Break for the Bankruptcy Mortgage Cramdown Legislation

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

After a few days of quiet early in the Congressional two-week Easter break which ended this last weekend, reliable details are now emerging about the intense negotiations on the bankruptcy mortgage cramdown legislation among Senators and their staff during the break. After the Senate leadership decided in mid-March not to bring a bill to the floor for a vote before the break (see my earlier Bulletin on this), rumors arose that the legislation was in serious trouble. Indeed there is more doubt now that a bill will pass Congress than at any time since the beginning of the session. All indications are that at the least the bill that passed the House of Representatives on March 5 will not pass the Senate without significant changes. However, the vigorous horse-trading of the last week or two which has now come to light--occurring even while Congress was not in session--shows that the legislation is very much alive. But whether any bill will pass in the Senate, and then survive in a conference committee to resolve the almost certain differences from the House bill, is still impossible to predict.

If a bill does emerge into law, some of its most important provisions will be shaped by how Congress resolves the issues which were the subject of the last few days of negotiation, as follows:

1) Potential Restriction to Subprime Mortgages

On April 16, a spokesperson for Senator Richard Durbin, sponsor of the Senate bill and the Senate Majority Whip, said that one of the main points of contention is whether to limit bankruptcy cramdowns to certain kinds of mortgages, at the extreme end only to subprime mortgages. Indications are that such a severe restriction is unacceptable to Sen. Durbin. In contrast, the bill passed by the House has no such restriction, in that it is applicable to any mortgage "secured by a security interest in the debtor’s principal residence that is the subject of a notice that a foreclosure may be commenced with respect to such loan." (See my prior Bulletin on the key terms of the bill passed by the House.)

2) Potential Restriction to Mortgages of Limited Time Periods, Limited in Amount

Bankruptcy mortgage modifications are limited in one compromised version to loans originated before 2009, and with a balance of less than $729,750. The modification provisions would expire in 2014. In contrast the House-passed version would include loans "originated before the effective date" of the law, thus including those entered into so far this year. And importantly there is no explicit maximum loan balance in the House bill, and no sunset clause.

3) Restrictions Related to Non-Bankruptcy Mortgage Modifications

Before its early March passage, the House bill had been delayed by and then amended at the behest of a group of self-styled "moderate" Democratic Representatives. This amendment required bankruptcy judges in certain circumstances to consider whether a non-bankruptcy loan modification consistent with President Obama’s Homeowner Affordability & Stability Plan had been offered to the homeowners before their Chapter 13 case was filed. For more details on this provision, see my earlier Bulletin titled The Terms of the Bankruptcy Mortgage Cramdown Bill Passed by the House of Representatives--The Cramdown Itself. A potential Senate compromise would convert this limited and at least somewhat discretionary standard and turn it into a explicit restriction: if a lender offered a modification through the Obama plan or last year's Hope for Homeowners Act program called the Hope for Homeowners Act, the homeowner would be ineligible to modify their loan through bankruptcy.

Another related potential compromise: if a homeowner ended up paying a quarter of income or less for the mortgage under a non-bankruptcy modification under the Obama plan, he or she would not be eligible for a bankruptcy modification.

4) Limits on Principal Reduction

Mortgage holders have been highly resistant to lowering principal balances, in large part because they do not want to lose any more discretion on how to value such assets. This issue is one that is near the heart of the mortgage crisis. A potential compromise in discussion among Senate negotiators would not allow mortgage principal reductions for certain low-income borrowers who pay less than 31 percent of their income for their mortgage payments. Instead they could only have their interest rates reduced or their loans amortized over a longer time.

5) 50-50% Split of Residential Sale Proceeds

In mortgages where the principal is reduced by a bankruptcy judge and the residence is then sold during the Chapter 13 case for more than the court-determined value, one possible Senate compromise would have the mortgage holder and homeowner evenly split any such profit. This is actually less generous to mortgage holders in some respects than the House bill. The House version's annually graduated schedule pays to the mortgage holder 90% of such potential profit during the 1st year of the Chapter 13 plan, 70% the 2nd year, 50% the 3rd year, 30% the 4th year, and 10% the 5th year.

Current Prospects in the Senate

Max Gleischman, Senator Durbin's spokesperson, said on April 8 that the bill in the form that passed the House bill in March “doesn’t have the votes to pass the Senate.” So the pressing question is what compromises will be struck in the next few days to come up with a bill which the leadership believes will pass. According to an April 16 CongressDaily / NationalJournal.com article, "Democrats hope to move the measure this month with a deal in place."

Congress is scheduled to reconvene on Monday, April 20. Prospects are that the negotiations will only intensify.

Addendum: Potentially Influential Report for the Senate Debate

Mr. Gleischman says that Senator Durbin sought independent analysis of the controversial issues behind his mortgage cramdown proposal from, among other sources, a Credit Suisse/Fixed Income Research report of late January 2009. It is titled "Bankruptcy Law Reform – A new tool for foreclosure avoidance." Given how extensively this respected research organization's earlier study on the projected number of upcoming foreclosures was cited by the press and by many governmental decision makers, I anticipated this new report's similar impact. See my prior Bulletin titled New Report by Influential Credit Suisse Cautiously Supportive of Chapter 13 Mortgage Cramdown Legislation. This study goes to the heart of the issue: the potential effectiveness of Chapter 13 residential mortgage cramdowns and their potential effect on future mortgage credit markets. It is highly worthwhile reading.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys