Financial Reform: Cramdown Fails, CFPA Preserved

Dec. 11 (Bloomberg) — Republican lawmakers defeated a mortgage “cram-down” amendment that would have given federal judges the power to lengthen mortgage terms, cut interest rates and reduce loan balances for homeowners in bankruptcy court.

The U.S. House of Representatives voted 241-188 today, stripping the amendment from a broader package of proposed laws to rein in excess on Wall Street. The cram-down provision was identical to legislation that passed the House in March and then failed in the Senate amid opposition from the banking industry.

Banks and broker-dealers told House leaders in a Dec. 8 letter that the legislation would increase bankruptcy filings, lead to abuses of the court system and undermine efforts to stabilize the housing market. Bankruptcy judges have had the authority to alter loan terms on vacation homes or investment properties, not primary residences as today’s amendment would have allowed.

Representative Dan Lungren, a California Republican, argued against the amendment, saying it would increase mortgage insurance premiums for borrowers “and deny help to those we seek to help.”

“This is a prime example of good intentions creating bad policy,” he said.

The House is debating broad legislation that primarily imposes stricter oversight of the financial services industry in response to last year’s upheaval of U.S. credit and mortgage markets and the failure of dozens of hedge funds, lenders and financial companies including Lehman Brothers Holdings Inc.

A final vote on the full legislation is scheduled for as early as today. The House bill is H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009. The Senate has yet to begin formal debate on its version on the bill.