Back in April, the banking industry and its allies in Congress successfully defeated a change to bankruptcy law that would have allowed bankruptcy judges to cram-down mortgage payments for troubled homeowners. The banking industry spent $42 million on lobbyists to defeat cram-down in the first quarter of 2009 alone, leading Sen. Dick Durbin (D-IL), the bill’s sponsor and chief proponent, to conclude that the banks “frankly own the place.”
But with no end to the foreclosure crisis in sight, interest in cram-down has been renewed, as the Senate Judiciary committee held a hearing on it and House Financial Services Chairman Barney Frank (D-MA) expressed an interest in reviving it in the House. Today, Durbin spoke with The Wonk Room about the future of the legislation:
DURBIN: We’ve gained from the first time I offered it to the most recent. We have more senators supporting it. The banking industry is extremely powerful on Capitol Hill and this is a proposal that they hate the most. Unfortunately, they don’t have an alternative and the foreclosure crisis is getting much worse.
Q: If cram-down doesn’t come to pass, are any of the other fixes realistic? Right to rent, something like loans for the unemployed?
DURBIN: I think we’re going to be forced into alternatives and I’m open to them…And even the bill I’m talking about, the bankruptcy reform, isn’t the complete package. We ought to be doing a lot of things. I think [cramdown is] central to it, because it creates a new climate of negotiations. If that lender knows that at the end of the day, the borrower might end up in bankruptcy court and the judge might have the last word, there’s an incentive to sit down across the table.
Durbin added that he is going to begin asking mortgage companies for regular reporting on their progress in completing modifications, adding that “I think they can do a lot more.”
It’s undeniable that the mortgage servicers are not keeping up with the flood of foreclosures, which prompted the administration to bring 25 mortgage companies to the White House for a scolding last week. Thus far, just 200,000 homeowners nationwide are on track for a modification, with 108,000 of those having mortgages owned by Fannie Mae or Freddie Mac, both of which are pressuring companies to get modifications moving. So privately held mortgages constitute less than half of the modification effort, even though they account for 55 percent of delinquencies.
The New York Times reported that “many mortgage companies are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans.” Given that reality, Congress needs to find a real stick — cram-down or otherwise — to be used against companies eschewing modifications.