As foreclosures continue to surge, congressional Democrats are pitching bankruptcy courtroom solutions to homeowners' woes, but the Obama Administration says it has "no immediate plans" to revive the measure. 

With foreclosures continuing to climb and midterm elections just a year away, Congress is making a renewed push to allow so-called cramdown, which would let bankruptcy judges adjust the terms of home loans to give borrowers relief.   Loan cram down is part of the existing bankruptcy system, except when it comes to primary residences.  The banking industry hates cramdown but Democrats argue that earlier efforts to fix the housing mess have not done as well as hoped. Moody's Economy.com (MCO) estimates that 3.8 million homes will enter foreclosure this year, up 41% from 2008. No surprise, then, that lawmakers are getting an earful.

Many congressional Democrats think mortgage lenders need to feel the lash before they'll speed up mortgage workouts. Those critics, led by Senator Richard J. Durbin (D-Ill.), figure banks and mortgage servicers will do their best not to cut principal or interest rates on a mortgage. Lenders want to avoid, or at least delay, the loss they take from lowering what homeowners must pay, critics say. And despite an Administration plan that gives subsidies to mortgage servicers who agree to rework loans, many believe the service firms still gain too much from the fees they collect in foreclosure to bother working out a loan.

Durbin and other lawmakers are calling on Democrats to support what is seen as the party's nuclear option: cramdown. The proposal, which sailed through the House last spring, only to stall in the Senate on a 45-51 vote, authorizes bankruptcy courts to adjust mortgages. If Durbin's bill were to pass, a judge could reduce principal or interest rates on home loans and stretch out mortgage payments--something bankruptcy courts can do already with virtually every other kind of debt.

Supporters say cramdown would free homeowners from debt they can't afford while prodding lenders to cut deals before reaching the courthouse. A bankruptcy-court solution would also cost taxpayers little or nothing. Detractors argue cramdown would spook the mortgage market, driving up borrowing costs and making loans harder to get.

Undeterred, Durbin, the second-ranking Senate Democrat, is willing to attach a cramdown provision to any convenient bill if it won't get a hearing on its own. The proposal "will always be part of the conversation, if for nothing else than to scare the [daylights] out of everyone," says one senior Senate aide.

The financial industry, which used major muscle to kill the provision last spring, is arming for the fight, too. "The vote in the Senate was so overwhelmingly close, we're always worried," says one lobbyist. The big banks are leaning on community banks for help: These institutions were largely innocent of the worst excesses of the crisis and tend to be viewed much more favorably on Capitol Hill. "We are kind of the white hat," says a lobbyist for smaller financial institutions. "You'll see a lot of the industry try to hide behind us."

Given the industry's stance, supporters of cramdown say a forceful campaign by the White House would help. President Barack Obama supported it during the campaign and soon after his election, while his chief economics adviser Lawrence H. Summers wrote columns in favor of the proposal last year. But congressional sources say the Administration did little to push for passage of the bill last spring--possibly because Obama was reluctant to place further stress on already fragile banks. Now one Treasury official says the department has "no immediate plans" to revive the measure. Yet even without stronger White House support, Durbin might attract enough senators to embrace the bill if foreclosures continue to surge.

Source:  http://www.businessweek.com/magazine/content/09_42/b4151052063508.htm