Senate Votes Yay and Nay on Different Housing Bills

This week witnessed both a setback and a victory for the Obama Administration in its quest to alleviate the plight of distressed homeowners.

First came the victory, in the form of an expansion of mortgage aid. Specifically, borrowers with second mortgages will now find it significantly easier to refinance their first mortgages. Previously, “borrowers who [were] trying to get their primary mortgage modified at a lower monthly payment need[ed] the permission of the company holding the second mortgage.” This might not seem like much, unless you consider that these types of loans are “attached to about half of all troubled mortgages.”

“The administration initiative, funded out of $50 billion in financial rescue money, relies on a series of payments to mortgage companies as an incentive to modify second loans at lower interest rates.” Lenders will also receive government money in exchange for canceling second mortgages altogether. Borrowers, meanwhile, are eligible for cash that can be used to pay down the principal balance of their mortgages.

It’s unclear whether this plan will succeed where the earlier plan failed. The problem of course lies with the lenders themselves, as well as with the investors that own collateralized pools of mortgages. A component of the original plan, for example “was supposed to allow 400,000 troubled homeowners to swap risky loans for traditional 30-year fixed-rate mortgages with lower rates.” Unfortunately, lending standards have tightened to such an extent that it’s nearly impossible for borrowers to get bank approval for such a swap. “Meanwhile, lenders have said they are unable to change some mortgages because they fear being sued for breaking their contracts with investors who own pools of mortgages.”

All of this is outweighed by the defeat of the Helping Families Save Their Homes Act, which was voted down in the Senate despite its passage in the House. “The legislation, widely opposed by the financial services industry, would have allowed homeowners to petition bankruptcy court judges to write down the principal and interest payments for their primary home mortgages.” This practice was nicknamed “cramdown” and was first introduced in a bill nearly two years ago. Since then, the banking industry (with the exception of Citigroup) has universally opposed its implementation.

Mortgage debt and student loans are the main types of debt that are not forgiven as part of filing for personal bankruptcy. Excuse my cynicism, but the rejection of this legislation indirectly demonstrates the power of both lobbies in government. Even with limitations on time and caps on the size of mortgage, opponents were unwilling to budge. “Arizona Senator Jon Kyl said the measure would force mortgage companies to offset losses in court. ‘The result will be higher interest rates for home loans and fewer Americans will be able to afford to buy a house…The answer is not to incentivize bankruptcy by making it the means to save one’s home.’ ”

It’s back to the drawing board for now, as several Congressman have announced plans to introduce similar bills, with or without watered-down versions of the mortgage debt forgiveness clauses.