Cramdown legislation made its way through the House of Representatives on March 5, distressing some in the home building industry while others see it as a forward motion that inevitably must be done.
The House passed H.R. 1106 with a vote of 234-191, and now the legislation sits before the Senate, where banking consultant Bert Ely thinks it will sit and may even die.
"It is in limbo," said Ely, principal at Ely and Co., who is a staunch objector to mortgage modifications. "They are hung up for 60 votes. There will be a lot of negotiations, but any changes will have to go back to the House."
David Shapiro, founder and CEO of California-based EARN Group, a financial services boutique focusing on helping troubled homeowners stay in their homes, concurs with Ely in that the bill--in its current state--is not worth forward motion.
The cramdown legislation, introduced by Sen. Dick Durbin (D-Ill.) as the "Helping Families Save Their Homes in Bankruptcy Act" in the fall of 2007, has already failed three separate times in its calls for changes to Chapter 13 bankruptcy filings. If passed, it will allow bankruptcy judges to significantly reduce mortgages--both interest rates and principal, as well as lengthening the term of the loan--for at-risk homebuyers who would still be able to make payments on the adjusted current market value price.
The problem with the plan? There are a couple, say some in the industry.
"The reality is that we shouldn't pass laws that don't solve problems," Shapiro said about the question of whether or not the bill will fail in the Senate. He added that the best way out of this housing crisis is to deleverage the home, allowing the buyer to make affordable payments, the purchaser to share in any recouped value over the years, and for the banks to see fair market value.
Prior to the House passage of H.R. 1106, numerous financial associations and organizations sent a letter of opposition to House Speaker Nancy Pelosi and House Minority Leader John Boehner, stating the bill's provision will "harm the housing market, increase bankruptcy filings and abuse of the bankruptcy system, and increase the cost and availability of credit for new home buyers and those that want to refinance their mortgages."
"H.R. 1106 not only leaves in place overly broad mortgage cramdown authority, but also includes and extraneous provision that provides that even minor violations of the Truth-in-Lending Act (TILA) could result in a home equity loan or even a mortgage being disallowed in bankruptcy," read the letter sent Feb. 24. "Moreover, H.R. 1106 weakens language adopted by the Judiciary Committee that would have prevented applicants who committed fraud in their mortgage application from taking advantage of the cram down."
While bankers protect their balance sheet and politicians fight for their ailing constituents, home builder analysts and consultants see the legislation as a bandage for a gaping wound.
"Although net cramdowns would mitigate home price declines, home values in some neighborhoods could temporarily fall because debtors would be incentivized to understate the true value of their homes, thus creating low comps," wrote Citi analyst Josh Levin in a March 15 note. "In the mortgage market, second lien holders would be left with very little."
In fact, Rep. Tom Price (R-Ga.) proposed an amendment "to provide that if a homeowner who has had a mortgage modified in a bankruptcy proceeding sells the home at a profit, the lender can recapture the amount of principal lost in the modification," which was rejected on a 211-218 vote.
The National Home Builders Association neither supported nor actively opposed the bill. David Ledford, NAHB senior staff vice president of housing finance and land development, said NAHB likes the direction Congress is headed but does not think the bill should be permanent and that it should include heavy restrictions on who the bill would focus on.
"[H.R. 1106] should be only for loans made in the past," Ledford said, adding that while in the past NAHB would be opposed to this, the organization is now "more flexible in finding a solution."
The Senate is expected to take up the issue within the month.