The U.S. House of Representatives voted 234-191 to pass H.R.1106, which allows bankruptcy judges to cram down mortgages for homeowners facing foreclosure. The vote came mostly along party lines and after a week delay, as objections from the banking industry caused some centrist Democrats last week to stall the vote.
Long opposed by bankers and Republican lawmakers, bankruptcy cramdowns give too much power to too few individuals – the bankruptcy judges, critics argue. Moreover, bankers contend that passing the cramdown measure will increase costs for future home buyers and lead some borrowers to file for Chapter 13 unnecessarily.
Lawmakers added provisions that seek to make filing for bankruptcy a last resort for struggling homeowners. In its current form, HR1106 calls on bankruptcy judges to decide whether all other foreclosure prevention options were exhausted and whether loan modifications offered by loan servicers adequately reduced mortgage payments. Borrowers must show they reached out to servicers for a modification prior to filing for bankruptcy.
The Congressional Budget Office in a February report said at least 1 million borrowers may benefit from the allowance of cramdowns.
In addition to the cramdown measure, H.R.1106 permanently raises the federal deposit insurance amount for each bank or credit union account to $250,000. The Federal Deposit Insurance Corp.'s borrowing authority from the Treasury is also increased under H.R.1106, growing to as much as $100 billion for the purpose of replenishing the agency's insurance fund, which has taken a severe hit in recent months as bank failures have become more common. The package also incentivizes lenders to participate in the Federal Housing Administration's Hope for Homeowners program.