Video Summary
Bill Statistics
The Middle Class Position
The middle class supports.
How They Voted
45% with middle class
52% against middle class
3% did not vote
Grades
Senate
The Senate receives a grade of D for its support of the middle class on this piece of legislation.
45 Senators voted for the middle-class position; 51 voted against.
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See how each member voted on this bill:
S 896. (Housing loans modification) Durbin of Illinois amendment that would allow bankruptcy judges to reduce principal and interest rates on certain mortgages/On agreeing to the amendment
Introduced:
04.24.2009 [Senate]
04.24.2009 [Senate]
Sponsor:
Sen. Christopher Dodd [D-CT]
Sen. Christopher Dodd [D-CT]
2009 Senate Roll Call #174:
Yea-45, Nay-51
The Legislation:
This vote was on an amendment by Dick Durbin, D-Ill., that would allow bankruptcy judges to reduce the principal and interest rates of some delinquent mortgages if the creditors and debtors cannot otherwise agree on a loan modification (a process often referred to as “cramdown.”) It would apply only to homeowners at least 60 days delinquent on mortgages of no more than $729,000 whose loans began before Jan. 1, 2009. The amendment was offered to a bill that would ease application and eligibility requirements for a $300 billion foreclosure prevention program enacted to help blunt the impact of the economic downturn.
Durbin said with one in every six homes in foreclosure, his amendment makes sense as a lifeline for struggling every-day Americans.
“Two years ago, before we even started in on this crisis as we know it, I proposed a change in the bankruptcy law, a change which I think could have forestalled this crisis we know today. Along the way, there has been resistance to this change. By whom? The banks that brought us this crisis in America have resisted this change to do something about mortgage foreclosure. That is a fact. Last year, I offered this amendment to change the bankruptcy law, and the banking community said: Totally unnecessary; we don’t need this kind of a change. This mortgage foreclosure is not going to be all that bad,” Durbin said. “In fact, the estimates were of only 2 million homes in foreclosure last year from our friends in the banking community, the so-called experts. Here we are a year later. The estimate is now up to 8 million homes in foreclosure.”
Jon Kyl, R-Ariz., said he has no doubt that Durbin sincerely believes his amendment would help homeowners, but he said many experts believe that the amendment could have drastic consequences for the mortgage market in the form of higher interest rates for everyone.
“It would result in higher interest rates for all home mortgages, exactly what we do not want while we are trying to entice people back into the market,” Kyl said. “While attempting to solve a specific problem for a particular group of people, we could end up exacerbating this situation for all the people who would want to refinance or to take out loans in the future.”
By a vote of 45-51, the amendment was rejected. Of Democrats present, 43 voted for the amendment (including the most progressive members) and 12 voted against it representing some of the Democratic senators who preferred to limit the amendment to only the very riskiest mortgages, often referred to as “subprime”). Every Republican present voted against the amendment. The end result is that the measure went forward without language that would have given bankruptcy judges the authority to lower principal and interest rates on certain mortgages that are seriously delinquent.
The Middle-Class Position:
Middle-Class Supports. As the economy and the housing and job markets worsen, middle-class households continue to lose equity in their homes and are less able to afford their mortgage payments. The difficulty is compounded for those locked into predatory mortgages with high interest rates. The federal government and the mortgage industry’s continued failure to address the foreclosure crisis adequately could result in as many as 8.1 million foreclosures by 2012. Despite widespread calls for action to confront the crisis, foreclosures increased 81% in 2008. Voluntary mortgage modifications by lenders and banks, encouraged by policymakers in place of comprehensive federal action, have failed to make mortgages more affordable and prevent widespread foreclosures.
Extending the same bankruptcy protections to primary residences that currently apply to luxury yachts and vacation homes is not only fair, but will reduce foreclosures by about 20%, according to Credit Suisse, and benefit about 800,000 households, according to the Center for Responsible Lending. Strengthened bankruptcy protection is also beneficial to middle-class families who are not themselves facing foreclosure: the 2.4 million subprime foreclosures that the Center for Responsible Lending predicts will occur in 2009 will result in a $352 billion decline in property values for homes in neighborhoods surrounding those foreclosures, with an average decrease in property value per home of $8,667. Preventing foreclosures in those neighborhoods will keep property values up, benefiting all homeowners. Indeed, an analysis by the Center for Responsible Lending found that similar legislation would avoid 600,000 foreclosures and thus maintain $72.5 billion in wealth for families not facing foreclosure. Modification of mortgages in bankruptcy will help maintain property values, while keeping middle-class families in their homes, limiting the self-reinforcing spiral of foreclosures and falling home prices.
Additionally, the bankruptcy provision provides a powerful incentive to banks to offer homeowners affordable loan modifications in order to avoid costly bankruptcy proceedings over which they have little control.
From the Experts:
“[B]ankruptcy law is wildly off-kilter in how it treats homeownership. Under current law, courts can lower unreasonably high interest rates on secured loans, reschedule secured loan payments to make them more affordable and adjust the secured portion of loans down to the fair market value of the underlying property -- all secured loans, that is, except those secured by the debtor's home. This gaping loophole threatens the most vulnerable with the loss of their most valuable assets -- their homes -- and leaves untouched their largest liabilities -- their mortgages.”
– Jack Kemp, President George H.W. Bush’s Secretary of Housing and Urban Development, January 29, 2008
“Bankruptcy modification would permit homeowners to bypass all of the obstacles to voluntary loan modification—practical outreach and staffing problems, restrictive pooling and servicing agreements, and improperly motivated mortgage servicers. It could be administered immediately through the existing bankruptcy court system. Mortgage modification in bankruptcy would not impose any direct costs to taxpayers.”
– Congressional Oversight Panel of the Troubled Asset Relief Program, March 6, 2009
Beyond this Bill:
Critics of modifying primary mortgages in bankruptcy worry that interest rates will rise as a result, that the federal government is bailing out irresponsible borrowers, and that the provision will encourage bankruptcy, overwhelming bankruptcy courts. None of these criticisms is valid. Restricting eligibility to current mortgages in danger of foreclosure means that future mortgages will not qualify for modification. Thus, lenders will not raise interest rates on future mortgages based on the risk of modification in bankruptcy. Indeed, research demonstrates that mortgage markets (and interest rates) are not, in fact, influenced by the risk of bankruptcy modification. Further, the bankruptcy modification provision will protect all homeowners from the current housing crisis by mitigating house price declines. Foreclosures affect not only the families who lose their homes but entire neighborhoods, as property values decline with the appearance of unkempt properties, abandoned homes, and increased crime. Finally, concerns that the modification provision will incentivize bankruptcy are exaggerated. Not only is the provision limited to mortgages at risk of foreclosure, but bankruptcy itself is unpleasant, damaging credit and subjecting living expenses to court review.
The amendment’s restrictions on eligibility incentivize modification outside of bankruptcy and mean that only recalcitrant lenders unwilling to work with struggling homeowners will face the prospect of bankruptcy modification.
Still, modification of mortgages in bankruptcy will not solve the housing crisis. Further action to address widespread foreclosures – including a moratorium on foreclosures and a mechanism to require modification of mortgages outside of bankruptcy – is necessary. President Obama’s Homeowner Affordability and Stability Plan is an important component of such a comprehensive approach, but one whose efficacy is not yet proven.
The Amendment restores some fairness to bankruptcy law, which was changed in 2005 to treat middle-class debtors more harshly. Further legislation is necessary to reform the worst provisions of that bill that make it harder for debtors to get a fresh start.
