In Financial Regulation Debate, A Cramdown Comeback

Of all the 40-odd amendments to the massive financial reform bill being considered on the House floor Thursday, a cramdown provision for mortgage holders facing foreclosure is likely to create the greatest noise. Illustration

The cramdown option, which would essentially allow bankruptcy court judges to rewrite mortgage terms, was approved in the House by a relatively close margin earlier this year. But it has met fierce resistance in the Senate. Its chief sponsor, Richard Durbin’ (D-Ill.), has been unable to get it out of committee for some two years.

If the House amendment, offered by John Conyers (D-Mich.), becomes part of the final package, it will very likely put the legislation on a collision course with the Senate's version, which has yet to be completed. The House's final package could be ready as soon as Friday.

"We'll see; it will be difficult," said a senior Congressional staffer, who acknowledged such a provision would almost certainly be excluded from any Senate legislation.

Supporters of the cramdown plan were emboldened earlier this year when Citigroup —in the midst of a federal bailout—broke ranks with the rest of the industry and said it would support the bankruptcy court alternative.

The House version, which is not as tough on the mortgage industry as the Durbin one, was approved 234 – 191 in early March.

The bill, a compromise measure, requires bankruptcy judges to consider whether lenders offered homeowners a “qualified” loan modification. It also prompts homeowners facing foreclosure to seek a modification 30 days before taking their case to bankruptcy court. The Conyers amendent is essentially the same bill.

Proponents say the threat of a bankruptcy court filing would encourage lenders to make a more concerted effort in avoiding foreclosure.

The cramdown concept, which has the support of President Obama, last hit the Senate floor in the spring when Durbin and others tried to get it attached to credit card reform legislation.

Opponents say it undermines contract law and will raise the cost of borrowing as lenders factor in the possibility of bankruptcy proceedings.

The financial service industry has been both outspoken and aggressive about its opposition. Several industry groups recently sent a letter to House Speaker Nancy Pelosi (D-Calif.) and Minority Leader John Boehner (R-Ohio) restating their concerns.

Inside the Future of Wall Street

The same group—which include the American Bankers Association, the Mortgage Bankers Associaton and the Financial Services Roundtable—sent a similar letter to all members of the House Thursday, specifically adressing the Conyers amendment. has obtained a copy of that letter, which says, in part: "The housing market is struggling to recover and adopting the cram down amendment would inject more risk into the mortgage market...Additionally, the amendment will detract from efforts by Congress and the Administration to stabilize the housing market...."

That is a reference to the Obama administration's "Making Home Affordable" foreclosure prevention program, which was launched in the spring and appears to be gaining momentum.

What's more, data over the past few months suggests a moderation, if not sizable, sustainable improvement, in the rate of foreclosures.

The cramdown measure could hit the floor any any time in the amendment process which is expected to run from the late afternoon into the late evening.

The GOP will also offer up its alternative reform plan which, among other things, strips the Federal Reserve of all non-monetary policy power.

Even with this procedural complications, the House is expected to approve the bill by a healthy margin as early as Friday, according to sources.

Debate was completed late Wednesday on the 1300-page "Wall Street Reform and Consumer Protection Act", which has nine major pieces, covering everything from too-big-to-fail firms to executive compensation to derivatives trading.

Some of the bill's tougher measures, such as the creation of a consumer financial protection agency and guidelines on executive compensation, have drawn votes pretty much on party lines. Others have yielded greater margins of victory.

The Senate’s version of the complicated and controversial bill meant to prevent another financial crisis is in a state of limbo. It's chief sponsor, Sen. Chris Dodd (D-Conn.), who chairs the Senate Banking Committee, has encountered significant opposition on a number of issues at the committee level from both Democrats and Republicans. Committee negotiations toward a compromise have been underway for a couple of weeks.

House Financial Services Committee Chairman Rep. Barney Frank (D-Mass) has been shepherding work on the massive project public hearings on various issues were held in June. At that time, there was some hope President Obama—whose economic team laid out a blueprint for Congress in late February—would be able to sign a bill into law by year's end.

Concerns on 'Too Big to Fail'

Cramdown issues aside, the House version and Dodd's initial draft differ in a number of key areas, including the regulatory structure for the banking industry. Dodd, for instance, would consolidate the regulatory authority of four agencies, including the Federal Reserve, into one new entity. Frank’s bill would only consolidate the activities of two agencies into one, leaving some jurisdiction to the Fed and the Federal Deposit Insurance Corporation.

Key Senate Republicans are thought to favor less consolidation of banking regulators. They also have expressed reservations about the performance and competency of about the Fed.

The GOP, for instance, is concerned that the Democrat proposals on too-big-too-fail firms would essentially institutionalize federal bailouts.

Opponents on both sides of the aisle also say the creation of a new consumer financial protection agency is unnecessary and steps on the rights of states. Republicans in Frank's House committee mostly voted against the measure, which recently passed 39-28, closer than many other aspects of the wide-ranging bill.

The White House offered its first proposals on reform in late February, when the financial crisis was still a major threat to the economy. Since then, the need to pass major reforms has become less urgent for some in Congress.

The two versions of the bill, regardless of the Senate's final form, are likely to go through a complicated reconciliation process, wherein the two chambers have to hammer out a compromise version.

The reform process has also been complicated by something of a populist revolt in Congress against the unchecked powers of the Federal Reserve and the policies of Chairman Ben Bernanke, who used a variety of aggressive and unconventional measures to stabilize Wall Street and the financial system during the crisis.

Bernanke, who faces a Senate confirmation vote on a second term Dec. 17, along with Treasury Secretary Timothy Geithner have become lightning rods for critics of White House intervention in the private sector, both under the Obama and Bush administrations.

House Republicans introduced a plan that would limit the Fed’s authority to monetary policy and also address the role of the government-sponsored mortgage giants Fannie Maeand Freddie Mac in the financial crisis. The House legislation on its way to the floor next week does not specifically address the future structure or role of the two entities although some of its provisions clearly apply to them.