Friday, January 30, 2009

Is the Chapter 13 Mortgage Cramdown Bill Going to Be Enacted, and If So When?

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

The Chapter 13 mortgage cramdown amendment will likely occur, but not as quickly as some had predicted, and almost certainly with a number of changes limiting its scope.

The Cramdown Bill is NOT Going to Be Part of the Economic Stimulus Package
  • Why is this important?: That would have expedited its passage & likely improved its chances.
  • Reason: Tactical decision by Obama and Democratic leadership to reduce Republican resistence to the stimulus.
  • Specific goal: Avoid filibuster of stimulus bill in Senate, where it needs 60 votes & so requires at least some Republican support.
  • Good decision?: House passed stimulus bill on Tuesday 1/27 without a single Republican vote, even after aggressive lobbying by Obama, including a visit to Capitol Hill and meetings with key Republicans.
  • House Democratic leadership comments:
Senator Dick Durbin, sponsor of S. 61, said Obama persuaded him in a White House meeting Friday, 1/23, to remove the bankruptcy bill from the economic recovery package, but that Obama pledged his support for the bankruptcy proposal and would work with Durbin to attach it to other "must pass" legislation.

Speaker Nancy Pelosi: "We have a lot of work to do, and, as has been indicated, we have a deadline and a sense of urgency that we need to get the job-creation part of this [stimulus] done. We will have other legislation, or a free-standing bill, but we will get it [the Chapter 13 cramdown bill] done.”

House Majority Leader Steny Hoyer: "“I think [the bankruptcy bill] would probably hold things up in the Senate. President Obama, as you know, said he is for doing this but would prefer not to do this in the package because this package is so critical to get this done.”
Progress on the Bills (S. 61, H.R. 200 & H.R.225)

Senate: No legislative action since it was introduced on 1/06/09 and referred to the Judiciary Committee. But there was the dramatic news conference on 1/08 by the Senate leadership about getting Citigroup's support in return for concessions. See my recent Bulletin: Chapter 13 Mortgage Cramdown Bill Now Expected to Pass Within Weeks, May Be Attached to Stimulus Package: Citigroup Withdraws Opposition

House: After a 1/22 hearing by the Judiciary Committee on both H.R. 200 and H.R. 225, on 1/27 H.R. 200 was voted out of committee to the full House by a vote of 21 to 15, after some amendments were rejected, some adopted. Could not find if a date has been set for a vote by the full House.
The Amendments to H.R. 200:
  • Rejected: several Republican amendments to limit the scope of the bill, such as to subprime mortgages only.
  • Adopted: 1) A Republican-introduced amendment to exclude debtors who committed mortgage fraud; 2) FHA,VA & Dept. of Agriculture guaranteed or insured mortgages are EXEMPTED from cramdown; 3) any post-petition increases in home value would be shared with the mortgage lenders (decreasing with from 80% to 20% from the 1st to the 4th year of the plan) if the home is sold before the Chapter 13 discharge; and 4) a requirement that the debtor attempts to contact the mortgage holder or servicer at least 15 days before filing the Chapter 13 case, unless a foreclosure is scheduled within 30 days after filing, or for cases filed before the law's effective date the debtor attempts the contact before filing the plan or modified plan. Here is the bill with most of these changes, dated the evening of 1/26 (just BEFORE the hearing).
Please see my earlier Bulletins on the rest of the terms of the original bill, with the amendments informally agreed with Citigroup: The Essential Terms of the New--And Now Suddenly More Likely to Pass--Chapter 13 Mortgage Cramdown Bill and Crucial But Less Publicized Terms of the 2009 Chapter 13 Mortgage Cramdown Bill.

The Biggest Challenge for Enactment: Defeating Potential Filibuster

  • 60 votes are needed to break a Senate filibuster. Democrats have 56 Senators, plus two independents who caucus with them, plus potentially the yet-unresolved Minnesota seat.
  • Note: The sponsoring Senator of S. 61 along with its 7 cosponsoring Senators, and the sponsoring Representative of H.R. 200 along with its 16 co-sponsoring Representatives, and the sponsoring Representative of H.R. 225 along with its 39 co-sponsors--every one of them--are ALL Democrats.
  • Besides winning over at least a few Republicans, it also needs full Democratic support: Last year 10 Democrats did NOT back a similar but narrower bill. All 10 of these are still in the Senate.
  • The economic and political world has changed tremendously since then, but has it changed enough?

The Bottom Line

According to the Washington Post article cited below: "Banking executives privately acknowledge that some type of legislation is likely to pass and are arguing that its scope should be limited."

Worthwhile Articles, Papers
Written testimony by Adam Levitin, Associate Professor of Law at Georgetown University Law Center, before the House Judiciary Committee hearing on H.R. 200 and H.R. 225, on January 22, 2009. By far THE very best argument I have seen anywhere in support of Chapter 13 mortgage cramdowns; very thorough, with a wealth of supportive research and accessible references, systematically explains the fallacies in the arguments against Chapter 13 cramdowns, excellently written, a masterful paper well worth the time for anybody interested in the many public policy issues involved.
Written testimony by Christopher Mayer, Senior Vice-Dean of Columbia Business School, at the same hearing as above. Strongly opposes the bills and presents three very intriguing alternative plans to combat the mortgage disaster. In my opinion Prof. Levitin's much more detailed paper squarely, and generally successfully, addresses each of Vice-Dean Mayer's concerns about the bills, but the programs he advocates do grapple with some of the key problems with voluntary modifications, and in some form may well be helpful, in conjunction with the Chapter 13 amendments, His programs focus on the lack of financial incentives for mortgage servicers to negotiate modification, the huge problem of second and third lien holders, and spurring the depressed housing market through lower mortgage interest rates.
An excellent blog story on this House Judiciary Committee hearing on 1/22 at which these two above testified, on the Bankruptcy Prof Blog.
One of the better mainstream press articles on the House Judiciary Committee Hearing of last Tues., 1/27, from the Washington Post: Key House Panel Backs Measure Allowing Judges to Modify Mortgages.
And for the math-inclined, a Los Angeles bankruptcy attorney's amazing less-than-1-page "H.R.200 in Algebraic Form"!

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
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