Tuesday, April 28, 2009

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

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

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
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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