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Obama Bankruptcy quotes from July 2008:
Families, he said, who “are being preyed upon by predatory lenders. If you’re protecting America, America should be protecting you from unfair bankruptcy laws.”
He said he would create a “fast-track bankruptcy practice” for military families, which would ease restrictions against declaring bankruptcy, eliminate “unnecessary” paperwork and “let them keep a greater share of the value of their home.”
On the first day of the new Congress, Sen. Dick Durbin (D-IL) introduced legislation, the Helping Families Save Their Homes in Bankruptcy Act. Shortly thereafter, Citigroup announced revising the so-called mortgage “cramdown” rules that force banks to accept modified mortgages from customers who have filed for bankruptcy protection.”
But shouldn’t we, and the people who represent us, question why Citi and other lenders are rushing to make this new bankruptcy deal with law makers on their terms? I think that is exactly what we should do.
One of the reasons the foreclosure epidemic is so large is because homeowners can’t modify their mortgages for primary residences in bankruptcy court. Right now, as the law stands, if you declare bankruptcy, you are stuck with your primary mortgage and you simply have to negotiate new mortgage terms with your lender on you own.
Chapter 13 of the federal bankruptcy code allows bankruptcy court judges to reorganize an individual’s debt, but it does not give them authority to fundamentally alter a person’s primary home mortgage.
Section 506 of the Bankruptcy Code acknowledges that a lien is only a secured claim to the extent there is value in the asset to which it attaches. To the extent that the claim exceeds the value of the collateral, that portion of the claim is unsecured. In Chapter 11 or Chapter 13, even voluntary liens, such as mortgages and security interests, can be stripped down to the value of the collateral, with the exception of voluntary liens secured only by the debtor’s residence.
Congress is currently considering changes to bankruptcy law allowing the modification of home mortgages.
Citigroup Inc. has been working with law makers to hammer out legislation that would allow bankruptcy judges to modify home mortgages on primary residences, potentially helping thousands of Citi borrowers avoid foreclosure. Citi is working on revising the so-called mortgage “cramdown” rules that force banks to accept modified mortgages from customers who have filed for bankruptcy protection. I wrote about bankruptcy and 2nd mortgage cram downs last month. You can view that post here.
If you have been following this blog for any length of time, you would have read several posts (view them here) where I mentioned a day of reckoning coming for lenders and mortgage servicers. The day where the President-elect would officially take over the White House and back his fellow Democrats with the bankruptcy bill that has been stagnant for over a year now.
Many people have asked me to comment on the controversial announcement last week in which Citi Mortgage had agreed to allow bankruptcy courts to modify mortgages on primary residences. I’ll tell you one thing, I am not surprised one bit!
Personally, I thought it was quite obvious as to why Citi is making a bankruptcy deal with law makers behind the Washington scenes. I think the reason is because many lenders fear real change coming soon in the form of a new Commander-in-Chief in town who is going to put the cram down, or should I say smack down, on them if they don’t.
I guess Citi and a couple unnamed lenders figured they would beat the President-elect to the knock out punch.
What has lenders running scared and making secret deal with law makers?
Obama has openly voiced his feelings in regards to foreclosure prevention and he has openly supported the bankruptcy bill throughout his campaign. He had also openly criticized lenders and Wall Street for predatory lending throughout his campaign, saying that many CEOs were paid for snookering the American people and paid to fail.
This new deal between Citigroup and Senate Democrats seems like it was a move to avoid forced preconditions on pending legislation to permit bankruptcy judges to modify mortgages in bankruptcy. But I have details, commentary, questions and maybe a few rants to share with you.
First, the letters from Citi to the House and Senate outlining the changes that they requested be made to the legislation are available here for you to view. They requested three changes to S.66 or H.R. 200 ( Helping Families Save Their Homes in Bankruptcy Act of 2009).
In letters to members of the House and Senate, Citigroup Chief Executive Vikram Pandit endorsed the proposal, saying, “This legislation would represent an important step forward. Given today’s exceptional economic environment, we support its swift passage.”
- That the legislation be limited to loans in existence when the legislation is enacted. This gives the bill a sunset, of sorts, but it could be a long one, given some people have 30 or 40 years left on their loans.
- Only when a violation would give rise to a right of recission under the Truth in Lending Act can the claim be disallowed. Given the relative difficulty and cost of litigating such claims, this is not, in my opinion, a large concession. Consumers retain their rights under the Truth in Lending Act to bring a claim under its provisions and recovery (puny) statutory damages.
- A reduction in a loan’s principal balance is only available if the homeowner certifies they contacted the lender to modify the loan before bankruptcy. Note that the “reduction in principal” is only ONE of the options available to bankruptcy courts. Apparently, the court could freeze or adjust interest rates or extend the term of a loan even if a borrower had not contacted the lender. The only problem I see here is if lenders begin litigating whether the borrower has indeed contacted the lender. Borrowers who did so by phone won’t have great records of having done so. I would advise borrowers who call to also send a written letter and keep a copy asking for a modification.
So what are the chances of this legislation becoming law? There were several unsuccessful attempts to pass this bill last year, most recently as part of the Emergency Economic Stabilization Act of 2008. AKA the $700 billion Bail Out.
The “usual” bankruptcy opposition
It looks like the Mortgage Bankers Association (MBA) continues to oppose the bill. “We remain opposed to bankruptcy cram down legislation because of the destabilizing effect it will have on an already turbulent mortgage market,” said John A. Courson, president and CEO, and David G. Kittle, CMB chairman in a statement.
More opposition:
The interesting news is that 16 fellow Democrats are opposing this bill because it will impact the Bankruptcy Bill provisions they passed in 2005. Who are these people? Do the “Blue Dogs” ring any bells?
Legislative Mediators
The Blue Dog Coalition has frequently played the role of legislative mediator between Republicans and more liberal Democrats in the House. Blue Dog votes have occasionally angered Democratic party leaders who expected partisan loyalty over fiscal ideology. One notable example was in 2005 when Blue Dog members voted 32 to 3 to pare and limit bankruptcy protections.
As House Judiciary Committee Democrats quickly prepared last month to move legislation that would make it easier for bankruptcy judges to refashion home mortgages that are on the verge of foreclosure, the banking industry had to mobilize quickly to slow the bill they contend would rattle the shaky home mortgage market.
The bankers quickly worked sympathetic lawmaker offices with their in-house lobbyists. And they knew exactly whom to go to in order to stop the bill in its tracks: the Blue Dog Coalition of moderate-to-conservative Democrats.
Sixteen members of the coalition of business-friendly lawmakers sent a letter Oct. 16 to Judiciary Chairman Conyers asking him to delay consideration of the bill because it might undermine implementation of the 2005 bankruptcy overhaul law.
“We had concerns that a judge could come in and retroactively change the loan terms,” said Rep. Dennis Moore, D-Kan., who organized the letter.
“I consider myself very consumer friendly; I also want to look out for business.”
The Blue Dog letter forced Conyers to yank the bill from a full committee markup Oct. 24. He scheduled another hearing in the Judiciary Administrative and Commercial Law Subcommittee to go over concerns….
The letter represented the first time the Blue Dogs have flexed their political muscle in public this year on a business issue, much to the relief of lobbyists who are worried that a Democratic-controlled Congress will bring greater regulation and scrutiny of their industries…
Miller believes that more Republicans could join Steve Chabot (Ohio), the only Republican in committee to back the measure, to support his legislation. He also found an unlikely ally in former Rep. Jack Kemp (R-N.Y.), who previously served as Housing and Urban Development secretary.
However, the bill stirred controversy at the committee level. In a letter to Judiciary Committee Chairman John Conyers Jr. (D-Mich.), 16 Blue Dogs urged him to go slow when it appeared he would mark up the legislation without holding a full committee hearing. Panel Democrats wrangled over which homeowners the measure should benefit, and ultimately six failed to vote on the bill.
Many K Street sources hope that as more substantial bills come forward — tax overhaul, mortgage lending, and energy — that the 47-member Blue Dog caucus will have more sway to make the outcome of any legislation less burdensome on business…
“We do a lot of reach-out to them for a lot of reasons,” said Bruce Josten, executive vice president for government affairs at the U.S. Chamber of Commerce. “You have to work where you can work. They are go-to people.”
