Cramdown Deal

This doesn't look all that bad.

Mortgage “cram-down” legislation that stalled in Congress last week will require homeowners to exhaust all options before they could use bankruptcy to reduce their loan payments, according to a summary of the revamped bill.

The House of Representatives may vote as early as March 5 on the amended legislation, which would let federal judges lengthen loan terms, cut principal payments and reduce interest rates for borrowers in Chapter 13 bankruptcy protection, House Majority Leader Steny Hoyer, a Maryland Democrat, told reporters today.

Democratic leaders, who had pulled the bill from consideration, embraced an alternative plan pushed by the New Democrat Coalition, which calls itself a group of moderate lawmakers. The bill would require borrowers to seek loan modifications from their banks before they could qualify to amend their mortgage terms through bankruptcy protection.

Chris Bowers has some analysis. Basically it makes the bankruptcy court a last resort, which I thought it already was. I'm pretty sure nobody wants to go into bankruptcy as a first option. The threat of it hanging out there is what is needed to get loan modification from the lenders, and this just makes the homeowner seek that out first. The Senate staff is read into this as well, so this isn't a House-only compromise and will probably mean that cramdown will be a reality in the near future. Bowers writes:

Clearly, given that she was able to hold up the legislation, and forge a new deal altogether, this is a big victory for Representative Ellen Tauscher. At the same time, the changes seem light enough that the original proponents of the plan, including Representatives John Conyers and Brad Miller, can also claim victory. This is perhaps a true compromise. I might change my mind as more details come to light, but I think tonight that there is reason to be optimistic.

There were some ugly moments for this legislation, but ultimately, we're actually seeing a sensible policy change that will help keep people in their homes. This, of course, isn't the end of housing policy. The banks still own too many homes, and a lot of them haven't even hit the market yet. This means more cheap homes for sale, more blight, more erosion in property values, and more pain for homeowners. And considering that banks are basically toast because of all the bad securities in the housing market, the threat is global and massive. It's a major, major problem, and so far a solution is wanting. Robert Kuttner has some ideas.

It would make much more sense for the government to set up something like the Depression-era Home Owners Loan Corporation, which simply used the Treasury's own borrowing rate -- now about 3.5 percent for 30-year bonds -- to refinance mortgages directly. The outstanding principal could also be reduced, making the mortgage affordable. Bondholders could be compensated at so many cents on the dollar, using the government's power of eminent domain.

This approach would get the aid to where it most needs to go: to distressed homeowners. It would also sop up hundreds of billions of dollars worth of toxic mortgage-backed bonds, which currently are not trading at any price.

Indeed. The crisis in housing and banking are the two elements which is holding back Obama's efforts at recovery so far. It's a dangerous time.