Cramdown Is Back: Banks Against Homeowners, Round 2


Cramdown is back.

House Financial Services Committee Chairman Barney Frank (D-Mass.) tells the Huffington Post he plans to revive the effort to give bankruptcy judges the authority to renegotiate home mortgages -- by making it part of this fall's much-anticipated financial regulatory reform bill.

Wall Street banks scored an overwhelming victory in April when they soundly defeated a cramdown measure in the Senate. Only 45 Democrats voted with homeowners, dealing the measure the kind of defeat that often sends legislation off into the wilderness for years, if not for good.

Frank and Senate Majority Whip Dick Durbin (D-Ill.), who led the bill in the upper chamber, both said after its defeat that it was finished. Frank was dismissive when, about a week after the vote, HuffPost asked if cramdown might come back. "Excuse me, what planet were you on last week? The vote was 45 to 51. Why would you ask that? Do I think there's a likelihood we could overturn 45-51? No," said Frank. "I wish it weren't the case."

But since then, foreclosures have continued unabated and the unemployment rate has continued to climb, increasing to 9.7 percent last month. Both forces feed on each other and create a drag on the economy.

The Obama administration had high hopes for the law Congress passed intended to encourage mortgage modifications. The law is all carrot, however, and no stick. Cramdown is the stick. If banks think they could get hit in bankruptcy court, they're more likely to bargain.

On Tuesday, Frank was asked by HuffPost if he had plans to readdress cramdown. "Yes, as I will announce tomorrow, and I told this to bankers, given the slow pace of modifications, for whatever reason: they're not putting enough people on it, they're not taking it seriously, there are legal obstacles. As of now my intention would be to include the bankruptcy on primary residences in the reg reform."

Frank said that he met in Boston recently with Senate Majority Leader Harry Reid (D-Nev.), Charles Schumer (D-N.Y.), Jack Reed (D-R.I.) and Tim Johnson (D-S.D.); the latter three are all on the Senate Banking Committee. They told him, he said, that they were ready to make a serious push at major financial regulatory reform before the year was out. Frank guessed the House would act by October.

President Obama needs a win against the financial sector to blunt the populist anger rising about bailouts and bonuses. Frank thinks the must-pass reg reform could be the perfect vehicle to attach cramdown to.

He acknowledged that cramdown hadn't been able to pass on its own, but said that "it could be that the eagerness to get the bigger picture, gets that one done."

Regulatory reform could wind up being a major boon to consumers, with a chunk of credit card reform thrown in, too. Frank said that if credit card companies continue to jack up rates in advance of the effective date of the reform bill recently passed, "we could move that effective date up a few months in the reg reform bill." Other possibilities include a consumer financial protection agency and a provision that would mandate an audit of the Federal Reserve.

Frank said that as the foreclosure crisis has stretched on, Democrats who were skeptical of the need for cramdown authority have approached him to say that they now see the argument.

Rep. Brad Miller (D-N.C.), a lead proponent of cramdown in the House, said he ran into Durbin about two months ago and thanked him for his efforts. Durbin, he said, was hopeful that he'd get another crack at it before too long. Miller said Durbin may now get that chance because he banks were given an opportunity to reform and they haven't lived up to their end of the deal.

"Barney's really angry that we've done all this stuff, that the industry helped draft, and they said, 'If you do it this way, and you hold your mouth, and you stand on just your left leg, if you do all that, we'll have lots of modifications.' And nothing - nothing - has happened," Miller said.

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