September 23, 2008

Financial Lobbyists Warn against Bankruptcy Provisions in Bailout Bill

@ 1:52 pm by Hill Staff

A coalition of financial lobbyists on Tuesday sent a terse letter to Congress, urging House and Senate members against including bankruptcy provisions in the pending $700 billion Wall Street bailout bill.

The letter by 12 organizations including the American Bankers Association, the Financial Services Roundtable, the Independent Community Bankers of America, the National Home Builders Association and the U.S. Chamber of Commerce objects to provisions known as “cram-downs” that are being pushed by Majority Whip Dick Durbin (D-Ill.).

The provisions would allow bankruptcy judges to revise the terms of mortgages. Durbin pushed the changes unsuccessfully earlier this year, saying that the help was critical to homeowners battling foreclosure.

But the financial lobbyists revise their past argument against the provisions: That they would increase mortgage risk at a time when the market is already unsteady.

“Allowing bankruptcy cram downs will undermine the stabilization effort and will increase costs for taxpayers,” the letter reads. “Instead of adopting bankruptcy provisions, Congress should work with the Treasury Department to provide flexibility for loan modifications to take place for loans that are purchased by the government.  This would provide significant and immediate relief for borrowers.”

See a copy of the letter below:

September 23, 2008

To: Members of the U.S. Senate and House of Representatives

Re: Opposition to Including Bankruptcy Changes in Mortgage-Market Stabilization Plan

The undersigned organizations urge you not to include bankruptcy provisions in legislation implementing the Department of the Treasury’s proposal to stabilize the mortgage markets.

Specifically, we are strongly opposed to allowing bankruptcy judges to reduce the balance owed on a mortgage (“cram down”) and to rewrite the terms of mortgages. Authorizing write-downs of mortgages by bankruptcy judges will increase the risks of mortgage lending at a time when the market is already struggling, and this will harm consumers by increasing the cost of credit and reducing its availability.

Allowing bankruptcy cram downs will undermine the stabilization effort and will increase costs for taxpayers. Cram downs will make mortgage backed securities even harder to value and sell, and thus will exacerbate the credit crunch in home lending. Further, once a bankruptcy court crams down a mortgage bought by the government, the taxpayer takes an immediate and permanent loss.

Instead of adopting bankruptcy provisions, Congress should work with the Treasury Department to provide flexibility for loan modifications to take place for loans that are purchased by the government. This would provide significant and immediate relief for borrowers.

Sincerely,
American Bankers Association
American Financial Services Association
American Securitization Forum
Consumer Bankers Association
Independent Community Bankers of America
Manufactured Housing Institute
Mortgage Bankers Association
National Association of Home Builders
Securities Industry and Financial Markets Association
The Financial Services Roundtable
The Housing Policy Council
U.S. Chamber of Commerce

-J. Taylor Rushing

Archived under: Economy & Budget, Legislation, Lobbying, News
Tags: bankruptcy, Chamber of Commerce, Wall Street

9 Comments »

1. Congress better not listen to the big banks and mortage companies and the US Chamber of Commerce. They are in direct opposition to the American peoples' best interests.

   Comment by Joyce — September 23, 2008 @ 7:21 pm

2. The Banks have made these identical arguments before, but had the option of a bankruptcy cram down been available to homeowner there never would have been this tidal wave of foreclosure.
   Most people wish to save their residences, and with cram down most owner occupied loans would have been able to have been reworked allowing people to stay in there homes.

   This bailout is for the banks not the homeowners who need some real options in saving their homes.

   Comment by Ted Wolny — September 23, 2008 @ 8:39 pm

3. The Banks have made these identical arguments before, but had the option of a bankruptcy cram down been available to homeowners there never would have been this tidal wave of foreclosure.
   Most people wish to save their residences, and with cram down most owner occupied loans would have been able to have been reworked allowing people to stay in there homes.

   This bailout is for the banks not the homeowners who need some real options in saving their homes.

   Comment by Ted Wolny — September 23, 2008 @ 8:44 pm

4. "Further, once a bankruptcy court crams down a mortgage bought by the government, the taxpayer takes an immediate and permanent loss."

   How does the taxpayer benefit if the property is lost at a foreclosure sale? The tax payers will pay the maintenance and other carrying costs, pay a realtor, pay back and current taxes. Give people a way to save their home.

   Congress has missed the boat by leaving this provision out of the final bill.

   Comment by John Segaul — September 28, 2008 @ 8:33 pm

5. It would appear the banks would benefit because of the TARP funds available. My question is, what will happen to Credit Unions who have no access to TARP funds. Won't that bankrupt all the credit unions in the country?

   Comment by Martin Jeffries — January 27, 2009 @ 7:42 pm

6. Banks are notorious for stealing people's equity! That is a fact, whether it is sub-prime or option arms etc., many people were screwed by banks engaging in racketeering.

   It is my opinion that protecting homes is an excellent way to send a message to banks that homes are not investment vehicles; thats where people live. If the US government can not protect homes from bankruptcy and foreclosure you will see a bunch of homes boarded up across America. It is stupid that banks are again shooting themselves in the foot by opposing this legislation.

   Outrageous!

   Comment by Jay — February 2, 2009 @ 5:03 pm

7. Cram Down??? Absolutely! Screw the Banks & Wall Street!

   Comment by Whip FLOGman — February 25, 2009 @ 6:43 pm

8. Experimental finance aims to establish different market settings and environments to observe experimentally and provide a lens through which science can analyze agents' behavior and the resulting characteristics of trading flows, information diffusion and aggregation, price setting mechanisms, and returns processes.Online Finance Help

   Comment by Online Finance Help — March 4, 2009 @ 4:43 am

9. This site is unusually helpful on the topic of loan modifications, since other information online (direct from the U.S. Treasury and related websiste) is on-point but is still either biased in favor of hyper-technical readings of the Plan or a watered-down version intended for an uneducated public. I did find a site called HomeAffordPlan.com that seems to bridge the gap.

   Comment by gillian g. — March 8, 2009 @ 3:45 pm

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