National Journal reported today that a compromise may be in the works for long-delayed yet vitally necessary cram-down legislation that has been stuck in the Senate. The bill, which would allow bankruptcy judges to lower mortgage payments for troubled homeowners, has been the focus of a furious lobbying campaign by the banking industry, which seems to have finally backed down a bit. Pete Davis at Capital Gains and Games laid out the terms of the compromise:
It would only allow a first mortgage to be rewritten in bankruptcy if a bank failed to offer terms as generous as those in President Obama’s Making Home Affordable program or President Bush’s Hope for Homeowners program. At risk, low-income borrowers and those with mortgage payments of less than 31% of income would also be excluded. Only mortgages of less than $729,750 originated before this year would qualify.
In exchange for the banking industry caving on cram-downs, Sen. Dick Durbin (D-IL) has reportedly agreed to place in the legislation an “expansion of the FDIC’s line of Treasury credit to $500 billion from $30 billion,” which “might ease the FDIC’s proposed deposit-insurance fee increase for banks.” Predictably, the Wall Street Journal Editorial Board is denouncing the compromise today, lamenting that it is “threatening to snatch away” a “looming victory” for Sen. Jon Kyl (R-AZ).
As we went to press last night, Arizona Senator Jon Kyl still had enough votes to defeat a plan allowing judges to break mortgage contracts. So-called cramdown legislation, allowing bankruptcy judges to change the terms on some mortgages, has never gained political traction. But bank lobbyists are threatening to snatch away Mr. Kyl’s looming victory…Cramdown looked like a sure thing only a few weeks ago, but it has stalled thanks to Mr. Kyl’s principled stand and coalition building.
This is not a good day for a Senator from Arizona to be making a “principled stand” against helping homeowners. According to new data from RealtyTrac, foreclosure filings spiked in March, with Arizona one of the states leading the way:
Nevada, Arizona and California posted the highest foreclosure rates in the quarter, with Nevada being hit the hardest as one in every 27 housing units received a foreclosure filing. The rate in Arizona was one in 54, while the figure was one in 58 in California.
Banks have recently ramped up foreclosures, due to the expiration of many internal foreclosure moratoriums. Mortgage defaults are also spreading to higher-priced, more upscale neighborhoods. As a matter of economic recovery and fairness, cram-downs need to be enacted, and judging by the woes of his constituency, Kyl should be one of those most aware of the need.