Mortgage Cramdown Provision Rejected by Senate; Offered Bankruptcy Relief

On the eve of success for a very valuable piece of legislation that will instill a new set of guidelines for credit card companies' communication of interest rate hikes, fees and other monetary stipulations to consumers, a banking bill provision aimed to do similar justice for Americans struggling with mortgage debt and bankruptcy was shot down in the Senate on the last day of April.

The provision was part of a larger and much hyped bankruptcy and housing industry reform bill, the Helping Families Save Their Homes Act, that recently passed the House and was considered another major component of the Obama administration's effort to help alleviate America's collective debtload.

Called a "cramdown," the language would give homeowners facing severe mortgage concerns more flexibility, through bankruptcy judges, to negotiate their payment terms with lenders after filing. Specifically, it would modify a mortgage to reflect a home's current market value, as opposed to the price it garnered or value gained during the heart of the real estate bubble of the last several years.

However, the measure only received 45 votes in the Senate, helping the lending industry dodge another bureaucratic bullet in the face of so many banking reforms and bailout controversies. In March of this year, the cramdown passed the House rather comfortably at 234 votes to 191.

The proposal itself was a rather quiet train rolling through Capitol Hill engineered by Illinois Senator Dick Durbin, where its increasing momentum was beginning to startle banking and other lending trade organizations and lobbyists, which used the threat of additional "economic meltdown" if the provision was approved. The groups argued that it would simply result in banks charging higher fees to all mortgage holders to mitigate the risk of losing money should a borrower default.

The mortgage relief measure was designed to accommodate homeowners with sub-prime and non-traditional loans and would have only been in place until 2012.

A similar banking bill made its way around the house that did include the mortgage and bankruptcy addendum. However, the action in the Senate had a significant effect on the provision's lifespan in the House version. In other words, it didn't stand much of chance. Despite that, the cramdown was considered the heart of the legislation for some of its backers and when eradicated in the Senate, many politicians believed the overall bill lost a good portion of its teeth.

Since this is the United States congress, deliberations were inevitable. On April 29, a negotiated proposal included simply putting restrictions on what mortgages could be cramdowned by judges. It called for only allowing mortgages that were entered into prior to January 1, 2009, that were delinquent for at least 60 days and were not for more than $729,000. The modified version was all for naught, however. In fact, per an agreement in the Senate on April 30, no other cramdown legislation can be entered into the bill.

The rejection of the mortgage cramdown is thought to be representative of a larger statement being made by the business community and many Republicans about the federal government's ever-increasing involvement in private business. The fact that the measure had traction in March and is now completely absent is a strong testament to the power of the banking lobby, which had additional time to woo Senate leaders.

For now, those looking to rebuild after bankruptcy can take solace in the recent credit card industry reform. For now, the mortgage industry appears in control.