‘Cramdown’ legislation could be a losing battle, backers say

Controversial legislation that would give judges new power to rewrite home mortgages is on life support.

Leading House and Senate Democrats have fought for more than a year in favor of a policy they argue is critical to stemming foreclosures, keeping people in their homes and boosting the housing market. On Friday, the House dealt it a stunning blow when the measure — attached to a broad financial overhaul bill — failed, 188-241.

ADVERTISEMENT
The vote was the latest indication that the legislation, which the financial industry calls “cramdown,” does not have the support to make it through Congress anytime soon. The House passed similar legislation in March by a nearly opposite margin, but the Senate effort failed by 15 votes.

“You pick your battles, and this doesn’t feel like a battle that can be won. The consequences of not winning are pretty dire,” said Rep. Brad Miller (D-N.C.), one of the chief architects of the policy in the House. “If politics is the art of the possible, I’m just not sure this is possible, given the influence of the industry.”

There were roughly 40 House Democrats who dropped their support between the March vote and the vote last Friday. They included committee chairmen, fiscally conservative Blue Dogs and freshman and sophomore members in competitive races.

The bill suffered in part last week because it was a standalone measure with no other provisions attached. In March, the bill contained other sweeteners — including an increase in deposit insurance — but the centerpiece was the bankruptcy language.

Miller earlier this year worked with consumer advocacy allies such as the Center for Responsible Lending to pass the legislation amid huge lobbying opposition. The Democratic leadership knew it was a tough call in March and whipped the vote, Miller said, adding that leadership didn’t push quite as hard last week.

Meanwhile, the financial industry made the bill one of its top targets to defeat in 2009. Small and large banks, credit unions and a wide array of business interests fought a trench battle against the measure. The National Association of Federal Credit Unions (NAFCU) and Credit Union National Association (CUNA) both activated huge grassroots efforts over the year.

The industry argued it would increase the costs of borrowing and introduce huge uncertainties into the lending market.

The measure always faced tough odds in the Senate.

Senate Majority Whip Dick Durbin (D-Ill.) undertook weeks of backroom negotiations to attempt to strike a deal with some of the country’s largest banks and industry trade associations.

When the measure failed on the Senate floor, Durbin lashed out at the banks.

“I really wonder if I would go tell Sen. Durbin that he really needs to go back to bat to fight this battle,” Miller said soon after the House amendment failed.

A Senate Democratic aide would not rule out the measure returning next year, but said the House vote was discouraging, a point echoed by others.

“I was absolutely stunned when I saw the vote,” said Brian Gardner, an analyst at Keefe, Bruyette & Woods Inc. “I was operating under the assumption that it would pass and it didn’t mean anything because of the Senate.”

ADVERTISEMENT
Throughout the ups and downs of the debate this year, the Obama administration never came out strongly in favor of the bankruptcy measure. It was never a key element of the administration’s policies in the Home Affordable Modification Program (HAMP) to encourage lenders and servicers to modify mortgages.

“I think some members are willing to see if those are going to turn it around,” said Rep. Stephen Lynch (D-Mass.), who voted for the bankruptcy policy both times.

The administration is facing renewed criticism because most of the trial modifications have not become permanent. The combined percentage of loans in foreclosure or at least one payment past due was more than 14 percent in the third quarter, the highest percentage recorded by the Mortgage Bankers Association in its survey on delinquencies.

Rep. John Spratt (D-S.C.), chairman of the House Budget Committee, was one of the lawmakers who switched his vote between March and last week. Chuck Fant, his spokesman, said Spratt heard from community banks and credit unions opposed to the measure and felt that it was not necessary.

Spratt was also concerned that bankruptcy courts would be flooded with cases, Fant said.

Financial industry lobbyists for a wide range of associations said they were relieved by the vote on Friday, with one saying it would take a “perfect storm” for the Senate to take up the bill.

“As evidenced by the recent House vote and the Senate vote, there are major concerns with the bill on both sides of the aisle in both bodies,” said Scott Talbott, senior vice president at the Financial Services Roundtable.