A recent opinion piece in the Wall Street Journal claims that Senate Assistant Majority Leader, Dick Durbin, is using his control of the Senate calendar to break down resistance to a change in the bankruptcy laws that was passed in the House or Representatives but stalled in the Senate by the threat of filibuster.
According to the Journal, Durbin is blocking a bill favored by banks to expand "...the FDIC's line of Treasury credit to $500 billion from $30 billion. That extra credit might ease the FDIC's proposed deposit-insurance fee increase for banks..."
Banks have been the primary opponents of any changes in the bankruptcy law. They were unsuccessful in blocking the bill in the House, and for a while it looked as if a similar bill changing the law to help people in threat of foreclosure would pass the Senate. But opponents got support from Senator John Kyl, and he has organized the 40 votes necessary to prevent a vote from coming to the floor.
Current bankruptcy laws do not allow bankruptcy judges to alter the terms of first mortgages on residential property. (This is called a "cram down.") Judges can modify mortgage terms on second homes, investment properties and even yachts. They can wipe out credit card debt. But first mortgages have been untouchable for more than 25 years.
There have been several different proposals to add "cram down" authority to the bankruptcy law, and it is not clear exactly what a final bill might look like, but all the bills would allow homeowners who file bankruptcy to get the terms of their first mortgage modified. Bankruptcy court judges would be probably allowed to lower the principle of the loan, probably to 90% of the current market value, and to adjust the interest rate.
Proponents of this change argue that modifications made by bankruptcy court judges would not cost the lender as much as the foreclosure process (which typically costs the mortgage holder between $50,000 and $100,000); and they say it is better for the neighborhood if people are allowed to stay in their homes. Vacant homes become the target of vandals, lowering property values for all the surrounding homes.
Opponents argue that allowing "cram downs" would raise mortgage interest rates for everyone. The evidence offered to support this assertion is, however, limited and unclear. Proponents call it a scare tactic.
Bankruptcy judges are experienced at understanding when a debt modification plan will work and when it will not. If they think that modifying the terms of the mortgage will not result in the homeowner being able to afford the revised mortgage, they will not approve the plan.
Sent to HULIQ by www.askjackaboutdebt.com
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