In my last diary, I promised to come back and talk about bankruptcy reform. As the State Treasurer of Illinois and a former vice-president of a community bank, I know a thing or two about banking and, make no mistake, the defeat of the bankruptcy provision known as "cram-down," is yet another example of Washington putting corporate wishes ahead of citizen needs.
Join me below the fold for a discussion on this topic and for my philosophy on bankruptcy reform.
The Helping Families Save Their Homes Act and The Defeat of the Durbin Amendment.
The Helping Families Save Their Homes Act (HFSTH) was signed into law by President Obama on May 20, 2009.
While the law includes many much-needed reforms (see a White House fact sheet here), as is typical in Washington, stronger reforms were left by the wayside.
But, when HFSTH was making its way through the Senate, an amendment was offered by Senator Richard Durbin that would have permitted bankruptcy judges to lower the monthly mortgage payments for homeowners whose homes are worth less than the amount of their loans.
The St. Louis Dispatch summarized the bill and the battle:
Under Mr. Durbin's proposal, homeowners in bankruptcy could remain in their homes as long as they continued making the lower payments. In most cases, the mortgage holders also would come out ahead. They wouldn't have to maintain the properties and try to resell them in today's glutted market.
But the financial industry wants federal assistance to flow only one way. It's one thing for banks to get hundreds of billions of dollars in taxpayer money, but it's quite another for banks to cut their customers any slack.
The proposal stemmed from an authority long held by bankruptcy courts. Currently, judges can modify or "cram-down" the terms of most types of consumer debt, including vacation homes and other residential mortgages, but not that of primary homes. Yet making changes that include primary homes would give mortgage holders an incentive to work with borrowers in good faith and alter the terms of their loans before they are forced into bankruptcy.
The goal was to keep more families in their homes while housing prices return to normal levels, stabilize local communities threatened by record rates of foreclosure, and strengthen our overall economy.
The Senate ultimately rejected the Durbin Amendment, which needed 60 votes to pass. You can see the roll call here. Only 45 Senators voted for the amendment.
Why I Support Cram-Down Reform.
As a former community banker, I know that there are many good, conscientious lenders who will do whatever they can to make sure families are not kicked out of their homes and onto the street. Good bankers understand that foreclosures don't help our banks or communities thrive, and they don’t help keep the American dream alive. And frankly, it doesn't help their bottom line.
Banks renegotiate the terms of mortgages outside of court to give homeowners a second chance all the time. But since the subprime mess, many banks haven’t been as kind. That's why I supported this amendment; it only applied to lenders that failed to do the right thing by not offering loan modifications outside of court in the first place.
But the power players in the financial industry disagreed, and they certainly didn’t want to cede control of their business decisions to bankruptcy courts. They claimed the amendment would lead to more bankruptcy filings and prompt more homeowners to use bankruptcy as a threat to negotiate lower monthly payments, which would force lenders to raise interest rates.
Those arguments fall short. Homeowners do not want to risk long-term damage to their credit rating. Housing advocates dispute the higher interest rate claim and estimate the amendment would save hundreds of thousands of homeowners from facing foreclosure. In my experience, fewer foreclosures mean fewer bankruptcies.
But the Senate caved to powerful banking lobbyists when it gutted the amendment. And, to make matters even more frustrating, those lobbyists were paid for with money from the same banks that have received billions of dollars in subsidies from taxpayers in order to escape a financial firestorm of their making.
Senator Durbin said it best about banks: "they frankly own the place."
The debate over the bill and its ultimate failure demonstrate why we need to reduce the influence of corporate interests and their role in shaping policy.
When speaking on the Senate floor, Senator Durbin noted that when he first proposed the legislation two years ago, nearly 2 million American homeowners were at risk of losing their homes. Today, that number has skyrocketed to more than 8 million homes, accounting for nearly 1 in 6 mortgages in or on the verge of foreclosure.
The amendment’s defeat could have not come at worse time. Foreclosures nationwide continue to climb at record rates as interest rates rise, making the future of the housing market even more uncertain. The latest figures show that foreclosure filings increased 18 percent in May over last year.
But the real problem, one that is systemic in Washington, remains the undue influence of the big corporations that devote huge sums of cash to lobbying efforts and contribute generously to lawmakers who make these decisions.
This has to stop.
As many of you know, earlier this year, I decided to explore a run for United States Senate. I entered this race because I fiercely believe that Americans need as many vocal advocates in the Senate as they can get who will speak out against the grip of government insiders and special interests.
We need to take back our government from influence peddlers that use their money to shape policy at the expense of the middle class. That’s why I chose not accept contributions from corporate PACs or Washington lobbyists. And that’s why I unequivocally support cram-down reform.
We need more public service and shared sacrifices from all Americans-- politicians and corporations alike. I’ve said this before: this is personal to me. Both my parents were Greek immigrants. When they came to America, they didn't speak the language, and had no money.
Like so many, they worked hard, they sacrificed and they became successful. They started a community bank with the idea that banks are there to provide people the means to achieve their dreams and aspirations.
That’s the way banks should be approaching this crisis. The negotiations regarding bankruptcy reform shouldn’t be about maximizing profits, but about maximizing the American dream. The goal shouldn’t be to put up roadblocks, but to lend a hand.
There is a balance that both addresses the legitimate concerns of bankers and helps to preserve the dreams Americans thought they had finally achieved when they trusted these banks with their new home purchases.
To help achieve that balance, we need greater regulation of the financial industry to curb its influence and control.
Average homeowners simply can’t compete against the brute power of the banking industry, they can’t compete with the contributions that industry showers into the campaign coffers of lawmakers, and they can’t compete when industry lobbyists are so aggressive (and so successful) in killing consumer friendly legislation.
The time is right to pass meaningful reform. Giving bankruptcy judges more discretion to alter the terms of home mortgages is a good place to start. And we need that reform, now, to stem the tide of foreclosures that threatens the very fabric of our neighborhoods.
The banking industry won this round. But, for the sake of our economy and our values as Americans, they can’t win this fight. And we shouldn’t let them.