Controversial last-minute changes to House legislation empowering bankruptcy judges to alter primary mortgages will do little to prevent struggling homeowners from trying to save their homes through bankruptcy, according to a number of housing advocates who are following the debate. Rather, pressures to limit the scope of a similar Senate bill, expected to be considered next week, pose a greater threat to the effectiveness of the bankruptcy provision, the advocates say.
The House proposal — which would eliminate the prohibition on judges to “cram down” the interest rates and principal balances of some primary home loans — was passed last week as part of a larger anti-foreclosure package, but not before moderate Democrats insisted on changes they said would ensure that bankruptcy is homeowners’ last resort.
The amendments attracted the criticism of some liberal lawmakers — and a great deal of heat from liberal bloggers — who argued that Democratic leaders had caved to the demands of the finance industry at the expense of struggling homeowners. Yet many housing advocates maintain that the changes are largely symbolic, and likely won’t block pinched homeowners from pursuing the bankruptcy option.
One central change, for example, requires judges to consider whether homeowners were offered loan modifications from their lenders before filing for bankruptcy protection — something “judges would have considered before,” according to one housing advocate who spoke only anonymously.
Another amendment asks judges to consider cutting interest rates before reducing principal balances. Both provisions put the House bill more in line with the Obama administration’s anti-foreclosure strategy, leaving some housing advocates to downplay the controversy surrounding the House negotiations. “Does the homeowner qualify for Obama’s initiative? Frankly, that’s in the consumer’s interest,” said David Berenbaum, executive vice president of the National Community Reinvestment Coalition, a community development group.
Most of the House changes, Berenbaum added, “are fairly reasonable in our eyes. There will still be a large number of homeowners who will benefit.”
Senate lawmakers, who will take up the bill as early as next week, seem to agree. “It was certainly narrowed so that it could pass,” said Max Gleischman, spokesman for Sen. Richard Durbin (D-Ill.), who sponsored a Senate cram-down bill similar to the House-passed version. “But the general feeling is that the House sent over a pretty good bill.”
Many advocates say the larger threat to the bankruptcy provision’s effectiveness will come in the Senate. To gain the support of Citigroup — which broke ranks with others in the industry to support the Durbin bill earlier this year — Senate leaders agreed to limit the bankruptcy option only to those mortgages existing before the bill is passed.
Now the finance industry is pressuring lawmakers to limit the scope of the bankruptcy provision again to include only sub-prime mortgages — a change that housing advocates are fighting tooth and nail. “Limiting it to sub-prime doesn’t make any sense [now],” said Sharon Price, policy director at the National Housing Conference, an advocacy group. “A year ago — maybe. But at this point, most sub-prime loans are running their course, so it wouldn’t help many homeowners.”
The debate arrives as the nation’s housing market continues to tank, leaving an increasing number of homeowners struggling to retain their homes. Last year, foreclosure filings affected more than 2.3 million properties nationwide, up 81 percent from 2007 and 225 percent from 2006, according to RealtyTrac, an online foreclosure database. And the numbers are projected to rise. In December, Credit Suisse estimated that, without government intervention, the number of foreclosures could rise to 8 million by 2012.
To prevent that from happening, both Congress and the White House have stepped in with sweeping plans to stem the housing crisis. Last month, President Barack Obama unveiled a $75 billion strategy encouraging lenders and mortgage servicers to modify troubled loans voluntarily. The congressional cram-down proposal provides the stick to accompany Obama’s carrots.
House Democratic leaders — who have failed for years to pass a cram-down bill in the face of fierce opposition from Republicans and the finance industry — had prepped for an easier fight this year. But moderates in their own party — led by California Rep. Ellen Tauscher — hinged their support on the inclusion of amendments to prevent what they feared would be a run on the bankruptcy courts.
Last month, the Congressional Budget Office estimated that more than 1 million households would qualify for bankruptcy under the bill, of which about 350,000 would file for protection over the next decade.
Tauscher and other moderate Democrats also wanted assurances that the bankruptcy option is available only to homeowners for whom the mortgage is unaffordable — not merely underwater.
Their stand led House Speaker Nancy Pelosi (D-Calif.) to delay the vote on the housing package before accepting the moderates’ amendments last week.
From the liberal blogosphere, the reaction was furious. “How do they explain to their constituents that thousands of homes will go into foreclosure in each of their respective districts without this legislation, dragging the value of other properties in the area with them in an endless downward spiral?” FireDogLake founder Jane Hamsher wrote on The Huffington Post last week. “Do they really think voters won’t notice that they are aligned with the financial services industry against them?”
Some advocates echoed those concerns. David Abromowitz, a housing expert at the progressive Center for American Progress, said the House amendments place a disproportionate burden on homeowners, while letting the banks off the hook for making loans to folks who couldn’t pay them back. The provision requiring homeowners to pursue loan modifications from banks, for example “adds an additional hurdle for homeowners that tilts the advantage back to lenders,” he said.
Still, Abromowitz also has his eyes trained on the tough Senate battle ahead. “What senator would want to go through bankruptcy before going to their lender for a work-out?” he said, refuting the argument, popular among Republicans, that the cram-down legislation would inspire a flood of new bankruptcy filings. “And why do they think that the American people would act any differently?”