posted by admin on Mar 9

Banking lobbyists have stymied attempts to move a housing package in the Senate because of strong opposition to the bankruptcy provision that would allow a judge to adjust the principal of a loan, a provision referred to as a “cramdown.”

The White House has threatened to veto the bill and the rewriting of bankruptcy rules would undermine current mortgages. Cramdowns, or the ability of a judge to change the terms of a primary mortage that has entered into foreclosure works something like this: if a homeowner owed $300,000 on a house valued at $200,000, the judge could write off the $100,000 difference as secured debt the lender could not recover.

Even when compromise language to cap the cramdown was proposed, it failed to gain traction in the Senate. The modification would cover only existing subprime and adjustable-rate mortgages and would allow creditors to recoup lost mortgage principal after a modification if the borrower resells the home.

The Senate bill does contain language that makes it easier for seniors to get a homestead exemption of up to $75,000 as they go through bankruptcy, allowing them to save their house during a foreclosure proceeding.

The House Judiciary Committee approved similar bankruptcy language late last year, but the measure (H.R. 3609) has yet to advance to the floor. That bill won only a single Republican vote on the House panel, suggesting any effort to move the bill in the closely divided Senate could be difficult.

The White House continues to pitch its voluntary effort of persuading lenders to refashion mortgages with at-risk borrowers who are in foreclosure proceedings, contending it would be the most efficient and less costly avenue.

The collapse of the subprime lending market triggered the continuing slump in the overall housing market. About 1.8 million subprime borrowers who took out adjustable-rate loans that reset to higher levels after an introductory period are threatened with losing their homes to foreclosure.