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August 4, 2009

EFFORT REVIVES TO LET BANKRUPTCY JUDGES ADJUST MORTGAGES

Progress Report - In April, the banking industry and its allies in Congress successfully defeated a bankruptcy law reform that would have allowed bankruptcy judges to lower -- or "cram down" -- mortgage payments for troubled homeowners. The change was an integral part of the Obama administration's plan for stemming the foreclosure crisis, and while it initially passed in the House of Representatives, it garnered only 45 votes in the Senate. The banking industry spent $42 million on lobbying to defeat cram-down in the first quarter of 2009 alone, leading Sen. Dick Durbin (D-IL), the bill's sponsor and most outspoken proponent, to conclude that the banks "frankly own the place."

Since then, the mortgage modification effort has fallen short, and during the first six months of 2009, "a record 1.53 million properties were in the foreclosure process." One in 84 homes received a foreclosure notice in that period, and thus an interest in cram-down has been renewed. The Senate Judiciary Committee held a hearing on the measure last month, and both House Financial Services Committee Chairman Barney Frank (D-MA) and Durbin have indicated they will revive the bill.

When the Obama administration initially released its housing plan, titled Making Home Affordable, it set the goal of having mortgage servicers modify 3 to 4 million mortgages. The plan was based upon providing companies with financial incentives for completed modifications, while the threat of a cram-down would give servicers a reason to keep homeowners out of foreclosure, and avoid having a bankruptcy judge alter the mortgage in court. But without cram-down to round out the package, the modification effort has sputtered. 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 actively encouraging modifications. Privately-held mortgages constitute less than half of the modification effort, even though they account for 55 percent of delinquencies. The mortgage industry claims that it is attempting to keep up with the demand for modifications, but that it simply doesn't have the capacity. But the New York Times noted that "many mortgage companies are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans."

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