Fighting ‘cramdown’

The financial services industry and House Republicans are fighting back against a bill pushed by House Democrats that would empower bankruptcy judges to write down mortgage interest rates and principal.

The bill could be up for a vote on Thursday and is part of a broader effort to invigorate the housing market and re-brand a federal program begun last year to reduce foreclosures that has had scant results.

{mosads}Since Monday evening, the financial industry and House Republicans have sent a flurry of letters to the administration and House members in strident opposition. The “cramdown” provision is sponsored principally by House Judiciary Committee Chairman John Conyers Jr. (D-Mich.) and is part of a combined bill backed by Conyers and House Financial Services Committee Chairman Barney Frank (D-Mass.).

The industry says the bill is “overly broad” in allowing too many homeowners to head to bankruptcy courts; it also does not limit the size of a mortgage that can be reduced.

“The housing market is already unstable and enacting cramdown legislation would make things worse by adding even more risk to the mortgage market, effectively undermining efforts by Congress and the administration to stabilize the housing market,” said a dozen trade associations in a letter to House Speaker Nancy Pelosi (D-Calif.) and Minority Leader John Boehner (R-Ohio).

The American Bankers Association, Mortgage Bankers Association and Financial Services Roundtable sent individual letters on Monday to Congress and the administration.

Republican Reps. Spencer Bachus (Ala.), Lamar Smith (Texas), Trent Franks (Ariz.) and Shelley Moore Capito (W.Va.) wrote in a letter to Treasury Secretary Timothy Geithner that cramdown “is certain to yield negative long-term consequences for taxpayers and the federal government that will dwarf any benefit to the economy that cramdowns might create.”

President Obama offered support for cramdown generally in his housing proposal last week, but the financial-services industry cheered the president’s comments that courts should be seen as a last resort. The industry has long fought cramdown, but as the economy has deteriorated, some in the industry have begun to think that it could pass Congress.

“We oppose the bill,” said one financial-industry source. “If forced to choose between the two” — referring to the House bill and Obama’s comments — “we’d pick Obama.”