Friday, February 27, 2009

Thursday's Vote by Full House on Chapter 13 Mortgage Cramdown Delayed to Next Week Amid Frenzy of Amendments, Disagreements Among Democrats

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

This is an update of the Chapter 13 mortgage cramdown legislation since my Bulletin of February 19 called Prospects for Bankruptcy Mortgage Modification After Obama's February 18 Speech on the "Homeowner Affordability and Stability Plan".

1) Over last weekend and on Monday (2/23/09) Democratic leaders were giving signals that the legislation, having passed the House Judiciary Committee with amendments on January 27 (see the transcript of this hearing), would come to the full House for debate in the latter half of this week. On Monday, according to the news service Reuters, House Speaker Nancy Pelosi stated that a new bill repackaging the legislation would be introduced later that day (2/23) and could be debated on the House floor on Thursday (2/26).

2) Indeed on Monday H.R. 1106 was introduced. (It is titled the same as its predecessor, H.R. 200: Helping Families Save Their Homes Act of 2009). The new bill packages H.R. 200, basically as it was voted out of the House Judiciary Committee, with a number of important other mortgage-relief provisions, some of which, not coincidentally, are supported by Republicans. (Note that every Democrat on the Committee had voted for H.R. 200, every Republican had voted against it.)

the contents of amended H.R. 200, the new H.R. 1106 also:
  • Adds protection from liability for mortgage servicers who implement mortgage loan modifications.
  • Permanently increases deposit insurance limits to $250,000 for the FDIC (Federal Deposit Insurance Corporation) and NCUA (National Credit Union Administration), and increases their borrowing authority.
  • Amends the Hope for Homeowners Program in various ways to make it more workable, including an incentive to servicers of up to $1,000.
  • Authorizes the federal VA, HUD and Agriculture Department to pay the guaranteed portion of any losses incurred by mortgage holders or servicers resulting from Chapter 13 mortgage cramdowns.
  • Fixes the Chapter 13 trustee fee at 4% for plan payments made under the new cramdown provisions, with court discretion to waive these fees for debtors with income less than 150% of the official poverty line.
3) As of Wednesday (2/25) this combined bill was slated for 1 hour of General Debate" by the full House on Thursday, February 26. In the meantime dozens of amendments were proposed before the deadline to do so, by both Democrats and Republicans, a number by the latter which would have deleted the mortgage cramdown provisions entirely.

On Thursday this General Debate session (see transcript) occurred from 12:15 p.m. to 1:30 p.m, with vigorous speeches on both sides (including a couple in support by one of the cosponsors, Rep. Earl Blumenauer of Oregon).

Here are representative excerpts from the debate, first from another cosponsor, Rep. Brad Miller, (D.) North Carolina:
[I]it is remarkable after all that has happened in the American economy to still hear the talking points of the banking industry and the securities industry repeated verbatim without criticism, simply parroted. That the banking industry is really all about helping folks, that's what caused the problem; that they were trying too hard to help people; that they loaned, perhaps not wisely but too well.
The reality is, this is not going to affect the availability of credit. We've got plenty to judge that by. There have been rafts of economic studies by real economists in peer review journals that show that when you compare lending practices in one place and another at the same time with different laws, there is very little, if any, difference.
Now, the minority has tried to tap into the American anger at banks by calling this a bailout. The reason that the banking industry is so virulently opposed to this, this is the only proposal to deal with the foreclosure problem that does not give them tax money. We aren't begging them, we aren't bribing them to do the right thing; we will make them do the right thing. They will modify mortgages in the way they should have, voluntarily, involuntarily in bankruptcy court if they don't do it voluntarily.
And by Lamar Smith, (R.) Texas, the Ranking Member of the House Judiciary Committee:
This bankruptcy provision not only will fail to solve the foreclosure crisis, but also will make the crisis deeper, longer and wider. Allowing bankruptcy judges to rewrite mortgages will increase the overall cost of lending. Lenders and investors will hesitate to put up capital in the future if they fear that judges will rewrite the terms of their mortgage contracts. Less available capital and increased risk means that borrowers will pay higher interest rates in the future.
Allowing bankruptcy judges to rewrite mortgages will also encourage borrowers to file for bankruptcy. Under this bill, a borrower will be able to reduce, for example, a $500,000 mortgage to $400,000. When housing prices rise in the future, that borrower has no obligation to pay back the
100,000 amount they crammed down. Thus, the borrower receives a $100,000 windfall. And experts predict that receiving this windfall will provide an incentive for borrowers to file for bankruptcy.
If bankruptcy filings increase as a result of this legislation, which is predicted, it is unlikely that the country's only 368 bankruptcy judges could handle the additional caseload in an effective manner. This will prolong the crisis as borrowers wait for their bankruptcy plan to be court-approved.
The House floor debate ended with "no resolution thereon."

4) Already shortly before the start of this General Debate reports were surfacing that a postponement of a vote would likely occur. Overnight stories after the floor debate from the Associated Press and the Wall Street Journal indicate that the immediate cause of the delay were concerns about the legislation raised by conservative "Blue Dog" Democrats and "centrist" pro-business New Democrat Coalition members in a private meeting earlier this week . The debate is feeding off of the perceived national angst of the "responsible homeowners" who are continuing to be current on their mortgages, that they not be made to pay for the mistakes of those who supposedly made foolish or even greedy choices. Republicans in the floor debate constantly raised the concern of favoring the "irresponsible" at the expense of the "responsible." For example, by Rep. Jim Jordan of Ohio: "94 percent of mortgages are being paid on time. It is wrong to tell those individuals they are now going to have to in some way compensate or not be able to get credit in the future to accommodate those individuals, that 6 percent, who have behaved in an irresponsible fashion."

A meeting is scheduled for next Monday evening (3/2/09) for Democrats with Housing Secretary Shaun Donovan about this bill and its role in the Administration's overall "Homeowner Affordability and Stability Plan." And next Wednesday, March 4, is the Administration's self-imposed deadline to provide additional details about that Plan, and some Democrats want assurances that non-bankruptcy mortgage modification efforts will be effective before approving bankruptcy cramdowns as a tool of last resort.

What This Delay Means
There continues to be strong indication, as of yet, that bankruptcy mortgage cramdown legislation in some form will pass, and do so within the next few weeks. The Wall Street Journal story above states that a vote on the House Floor is not expected until at least next Tuesday. The Associated Press story above reports that the Senate is expected to get back involved in the legislation "within two weeks." But the delay unquestionably favors creditor organizations and others who are putting tremendous effort into narrowing it. The current central question seem to be whether or not the legislation will be significantly restricted, such as being limited only to subprime mortgages. And as with all controversial bills, the pragmatic question is whether there will be enough votes to get past a potential Republican filibuster in the Senate. With the Minnesota Coleman/Franken Senate race still tied up in litigation, and with Sen. Arlen Spector of Pennsylvania being the only Republican Senator thus far publicly supporting the bill, there is certainly a question about whether there will be the necessary 60 votes needed to get to a floor vote in the Senate.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report, likely by mid- or certainly late next week. PLEASE EMAIL ME at the address below IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED.

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