Monday, April 27, 2009

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

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

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.


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 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
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.

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