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1 May 2009

Baucus & Tester help bankers defeat home foreclosure relief

President Obama and most Democrats want to help homeowners by empowering bankruptcy courts to order modifications in the terms of mortgages. But not Senators Baucus and Tester. Although the House passed a similar measure earlier this year, yesterday Max and Jon joined ten other banker friendly Democrats in voting against Sen. Durbin’s amendment to S.896 to help homeowners save their primary residence:

The measure would have allowed bankruptcy judges to modify troubled mortgages, lowering the interest rate or principal balance, a process known as a cramdown. Bankruptcy courts can already make those changes for a second home or investment property, but not a primary residence.

“We’re saving vacation homes. We’re saving automobiles. We’re saving all of these other assets,” said  Sen. Barbara Boxer (D-Calif.). “But the main thing we should be saving, the residential home, is not allowed to be brought up in bankruptcy.” Washington Post, Senate Defeats Measure to Allow Bankruptcy Judges to Change Mortgage Terms.

Although Citigroup endorsed the measure, the rest of the big banks held firm against it. According to the New York Times:

Bank lobbyists had maintained that the legislation, if adopted, would have resulted in higher rates for all mortgage holders. A letter signed by 12 industry organizations this week to senators warned that the legislation would “have the unintended consequence of further destabilizing the markets.”

“Though interest rates today are at all-time lows, this legislation would result in higher costs for future borrowers,” the letter said.

But supporters of the legislation disputed that argument. President Obama sought the cramdown provision during the election, although the White House has done virtually nothing to move it through Congress. Senate Refuses to Let Judges Fix Mortgages in Bankruptcy.

James Kwak picks up the analysis in a posting on Baseline Scenario:

…But the way this issue played out had nothing to do with what would be best for the country as a whole; it had everything to do with what the banks wanted.

Instead of bankruptcy cramdowns, the Times reports that the banks got a reduction in the insurance premiums they will pay the FDIC for deposit insurance - which is like a group of car owners voting themselves lower premiums on their auto insurance. But because there is zero chance the government will let insured depositors lose money, any shortfall in the premiums paid by banks to the FDIC will be made up by the taxpayer.

Cramdowns are not an unalloyed blessing. They may increase the risks for mortgages, and thus slightly increase the costs of mortgages for everyone (an outcome with which I’m willing to live; it’s a small price to pay for economic stability). But the alternative — large numbers of homeowners losing their primary residence, a disaster for the homeowners and anything but a bonanza for the banks — is worse. Bankruptcy is not a picnic, and no cramdown will make it one. If a mortgage with onerous terms is involved in a bankruptcy, and if modifying those terms to something the person filing for bankruptcy can afford will keep him in his home, modifying the mortgage makes sense.

Somehow, Montana’s Democrats need to get that message to their blessings in the U.S. Senate.