Mortgage cramdown bills moving in Congress

WASHINGTON (1/12/09)—In its first week in session, the 111th U.S. Congress saw a flurry of activity on bankruptcy issues, including three mortgage bankruptcy "cramdown" bills, and an early revision to one of those measures.

Sen. Richard Durbin (D-Ill.), Rep. John Conyers (D-Mich.) and Rep. Brad Miller (D-N.C.) all introduced bills last week. The bills would, in part, allow judges to modify certain terms in certain mortgages in the bankruptcy proceedings, a practice called a "cramdown."

Ryan Donovan, vice president of legislative affairs for the Credit Union National Association (CUNA), said Friday the association is carefully evaluating the proposed legislation.

"CUNA remains concerned about unintended consequences of any legislative proposals that would open the federal bankruptcy code and allow for broad loan term modifications for homes in bankruptcy," Donovan said.

He added, "Giving bankruptcy judges wide latitude to change mortgage interest rates and maturity dates would have an adverse effect on existing loan portfolios held by financial institutions.

"In addition, the value and safety of existing mortgage-backed securities would be called into question."

Donovan noted that CUNA worked closely last year for modification in Durbin's 2008 cramdown bill and appreciated the effort that Durbin and his staff made to address many credit union concerns.

'We will continue our efforts to ensure those concerns are addressed in this year's legislation as well," Donovan said.

Changes have already been considered. A day after introducing his bill with provision strongly opposed by the CUNA and others in the financial services industry, Durbin announced he would make certain changes to his bill.

Durbin indicated that he would amend his bill to:

• Limit eligibility for bankruptcy modification of mortgages to only existing mortgages (mortgages originated by the date of enactment);

• Require homeowners to certify that they attempted to contact their lender regarding loan modification before filing for bankruptcy; and

• Provide that only major violations of the Truth in Lending Act (TILA) will invalidate creditor claims in bankruptcy, rather than TILA violations of any size.

CUNA also is working to add provisions to the bill that would make it less likely that borrowers able to pay their current mortgages will resort to bankruptcy simply to reduce their loan amounts.

"This situation is extremely fluid," said Donovan, "As the legislative process continues to evolve, we will continue to discuss credit union concerns with Sen. Durbin and Congressional leadership."