February 27, 2008

White House Threatens Veto Of Mortgage Reform Measure

The White House yesterday threatened to veto a Senate Democratic housing stimulus package, saying it would cost too much and rewrite bankruptcy rules that would undermine current mortgages.

In a Statement of Administration Policy [PDF], the Bush administration listed many items that it objected to in Senate Majority Leader Harry Reid's bill of direct aid and consumer-friendly initiatives designed to help homeowners who cannot afford to pay their mortgages because they took predatory loans. It said many of the provisions are "unnecessary, costly, and counterproductive."

The White House opposed a provision sponsored by Senate Majority Whip Richard Durbin, D-Ill., that would allow a judge to change the terms of a primary mortgage that has entered into foreclosure. Durbin reworked his provision to pick up support, such as credit union lobbying groups that received a carve-out for members that made interest-only loans for those with good credit histories.

"Amending the bankruptcy code in this manner would undermine existing contracts, leading to contraction in mortgage credit availability and affordability. These and other bankruptcy-related provisions in the bill would rewrite long-standing tenets of bankruptcy law in ways that would fundamentally alter the expectations of parties to hundreds of thousands of home purchases after the fact," the statement said.

Lenders are working to defeat the bill primarily because of the Durbin language, which banks contend would raise mortgage costs because they would be unsure whether they would generate sufficient profit if the loan terms could later be rescinded.

The Durbin language is similar to legislation approved by the House Judiciary Committee in December. Durbin's bill does include an additional provision that makes it easier for seniors to get a homestead exemption of up to $75,000 as they go through bankruptcy, allowing them to save their house during a foreclosure proceeding.

The bill is not expected to be voted on until next week, leaving time for wrangling. For example, the National Association of Federal Credit Unions is pitching to cap the amount that a judge can adjust the principal of a loan, a provision referred to as a "cramdown" -- which is the source of main opposition from bankers. For example, if a homeowner owed $200,000 on a house valued at $150,000, the judge could write off the $50,000 difference as secured debt that the lender could not recover.

"We believe that including such a cap would further enhance the compromise language," NAFCU President Fred Becker Jr. wrote in a letter to Durbin on Tuesday.

Outside the bankruptcy language, the White House indicated other problems with the bill, such as providing $4 billion in Community Development Block Grant funding for cities to purchase and rehabilitate foreclosed properties.

"In addition to being extremely costly, this new program would constitute a bailout for lenders and speculators, while doing little to help struggling homeowners. This new program would also be slow to expend money and thus would not provide timely stimulus or immediate relief," the statement said.

The administration has pitched its voluntary effort of persuading lenders to refashion mortgages with at-risk borrowers who are in foreclosure proceedings, contending it would be the most efficient and less costly avenue.

Democrats have derided the plan, dubbed Project Lifeline, noting that it has helped a small percentage of subprime borrowers who took out
adjustable-rate mortgages that reset to rates that made them unaffordable.

The lending industry has stepped up its outreach on the bill, calling in allies to warn that the Durbin language could signal a first effort to roll back the 2005 bankruptcy law that many industries fought to enact after many years.

The U.S. Chamber of Commerce wrote in a letter to senators Tuesday that it opposes any effort to bring the bill to the floor because of the Durbin language, even as it supports other provisions in the package, such as a measure that would raise by $10 billion the cap on mortgage revenue bonds so housing finance agencies could refinance troubled home loans.

-Bill Swindell, CongressDaily

Posted at 9:12 AM
Posted to: Bush Administration, Congress, Economy, Senate
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