Yesterday, all 50 state Attorneys General opened a joint investigation into the ongoing foreclosure fraud scandal that has led some of the country’s biggest banks to suspend foreclosures as they sort out whether or not they improperly threw borrowers out of their homes. “The financial institutions would be well served by working with us to get it cleaned up,” said Ohio Attorney General Richard Cordray. “And they’d also be well served to think about reaching negotiated resolutions with borrowers in cases where they’ve created exposure for themselves by committing fraud upon the courts.”
I wrote last week that federal policymakers should take advantage of the voluntary foreclosure moratoriums that the banks have imposed to streamline and improve federal mortgage modification programs (which, to this point, have been incredibly disappointing and dysfunctional). Illinois Attorney General Lisa Madigan also has an idea: reviving cram-down legislation, which would authorize bankruptcy judges to reduce loan principal for troubled borrowers in court:
Illinois Attorney General Lisa Madigan said she was preparing to introduce legislation meant to tighten foreclosure laws and prevent document errors in the future. She also is pushing federal representatives to resurrect a bill that would allow bankruptcy judges to “cram down,” or cut, a troubled homeowner’s mortgage debt.
When it comes to housing fraud issues, Madigan is worth listening to. After all, she was warning federal regulators about the dangers of subprime lending long before the housing bubble burst. Those regulators simply failed to act on the information she was giving them.
Cram-down legislation, remember, has repeatedly come before Congress in the last few years, only to run into the buzzsaw of the banking industry and its allies in the Senate. But authorizing cram-downs would provide homeowners with a key stick in their often hopeless quest for a mortgage modification. Banks are far more likely to play ball with a homeowner if they know that a judge may unilaterally alter a mortgage.
But allowing mortgages to be altered in bankruptcy is also a simple matter of equity. As David Abromowitz noted, “few Americans realize that single family homeowners living in their own primary residence are the only real estate owners without cram down protections in bankruptcy.” Second homes, vacation homes, and properties owned by real estate moguls all enjoy cram-down protection that main residences don’t.
Now, I’m not overly optimistic about the chances of legislation authorizing cram-downs getting through the Senate. The idea has been proposed over and over — and has made sense on the policy-merits for years — but never garnered close to the 60 votes that would be necessary to surmount the almost inevitable Republican filibuster. But cram-downs could make a big difference in pushing the banks towards making more modifications, which to this point, they have been loathe to make.