Bankruptcy Cram Down Dead For Now

Jonathan D. Colman

Although the Senate vote hasn't actually taken place (expected mid-afternoon) bankruptcy "cram down" is effectively dead on the Hill for the time being. The 60 votes needed are simply not there. This is the measure, approved by the House, to allow bankruptcy judges to modify home loans, including writing down the principal on those loans. The banking industry has been wildly opposed to it, claiming that the provision would cast uncertainty over the value of all home loans, and thereby raise interest rates for everyone.

One insider very close to the process on the Hill tells me, "If you asked me four months ago, I would have said cram down was a lock."

But apparently three things happened:

First, despite President Obama's endorsement of the idea during his campaign and his adding the proposal to his overall housing rescue plan once he was in office, the administration did not really get behind it. My source tells me, "privately Treasury officials have not been enthusiastic."

Secondly, moderate democrats along with the GOP never really had their concerns addressed, and "they use the pending implementation of the Obama loan mod plan as an excuse to defer action," says my source.

Thirdly, the financial sector mounted a really strong lobbying campaign, not to mention the Mortgage Bankers Association, which has a good deal of clout 'round these parts, and the U.S. Chamber of Commerce, which sent a letter to every member of the Senate yesterday, urging each to reject the bill.

Senator Chuck Schumer (D-NY) was quoted today saying, "We'll try again," but I wonder. In the end, the bill was so narrowed to the point that only borrowers already in foreclosure who were unable to get any kind of modification under the Obama Make Home Affordable Program, could be eligible. And then there's the fact that many many many Americans (many of them writing into the blog) are really sick of government spending more money, bailing out lenders, increasing bureaucracy and syphoning easier/cheap credit to borrowers who might not be deserving of it...all at the expense of responsible bill-paying consumers.

Of course, if the government and private sector loan modification plans don't produce positive results, and foreclosures continue to rise, it may be back.

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Questions? Comments?