Lenders Battle Lawmakers Over Letting Courts Modify Mortgages

By Renae Merle
Washington Post Staff Writer
Tuesday, April 21, 2009

As lenders begin to implement the Obama administration's foreclosure rescue program, Senate Democrats are wrangling with the financial services industry over a key part of the plan that would permit bankruptcy judges to cut the principal owed by mortgage borrowers.

Congressional and industry officials said progress is being made, but no deal has been struck. Major lenders, including Bank of America, Wells Fargo and J.P. Morgan Chase, negotiated with Sen. Richard J. Durbin (D-Ill.), who is leading the effort in the Senate, through the recent two-week recess, officials said. The banks declined to comment.

"We're certainly making progress but have yet to reach an agreement," said Max Gleischman, Durbin's spokesman.

Under the proposal, a bankruptcy judge could change the terms of a distressed homeowner's mortgage to make it more affordable, including lowering the principal balance or interest rate, a process known as a cramdown. The measure passed the House by a wide margin last month, but then stalled. Senate leaders hope to reach an agreement and vote by Memorial Day. The Obama administration has said the measure is an important part of its efforts to reduce foreclosures.

The negotiations, which have also included the Credit Union National Association, have touched on provisions pushed by the financial services industry to blunt the impact of the change. For example, lenders want the cramdown authority to expire by 2014. There is also debate about how to make bankruptcy modification the last resort for borrowers.

"Any legislation should include a provision requiring the borrower to consider an offer of a modification -- one sanctioned by the government or something as effective -- before a cramdown can be considered," Rick Simon, a Bank of America spokesman, said in a statement. "This would give servicers incentives to provide workouts and borrowers an incentive to use them and avoid bankruptcy."

It is unclear whether even the support of major lenders would be enough to bring along the rest of the financial services industry, which has argued for years that cramdowns would drive up losses and that homeowners would flood bankruptcy courts. One of the largest banks, Citigroup, threw its support behind the process earlier this year. But the Mortgage Bankers Association and American Bankers Association, major industry groups, are not part of the current negotiations, and congressional Republicans continue to resist the provision.

The provision "fundamentally alters the way mortgage lending is done and actually hurts the housing market. Lenders and borrowers are the best people to change the terms of the mortgage," said Scott E. Talbott, senior vice president of government affairs of the Financial Services Roundtable, another industry group.

The Independent Community Bankers of America had been observing the negotiations, but walked away last week, said Camden Fine, president of the group. "Basically we were told by the senators that are involved that we either had to agree in principle to some sort of cramdown provision or we couldn't stay in the room," Fine said. "And we could not agree to that because we don't agree in principle."

Key Democratic lawmakers have attempted to gain support from some lenders by bundling the legislation with a provision to lift a cap on how much credit unions can lend to small businesses. Some lawmakers have also offered to increase the Federal Deposit Insurance Corp.'s borrowing authority. Banks want the borrowing authority raised to prevent a hefty special assessment from the FDIC.

"We just don't believe that cramdowns should in anyway be linked to FDIC borrowing authority," Fine said.

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