On July 23, 2009, the Senate Committee on the Judiciary, Subcommittee on Administrative Oversight and the Courts scheduled a hearing on “The Worsening Foreclosure Crisis: Is It Time to Reconsider Bankruptcy Reform?” Due to the rise in foreclosures and continuing high level of unemployment, Democratic senators are attempting to revisit the bankruptcy reform that would allow debtors to “cramdown” their mortgage debt to the value of the real property.

Those who presented testimony before the Committed were as follows:

Proponents for the Cramdown

Alys Cohen, staff attorney for the National Consumer Law Center, indicated that, “[u]nless HAMP both increases its reach and mandates principal reductions, Congress should pass legislation to allow bankruptcy judges to modify home loans in bankruptcy and also should consider further reforms to the servicing industry.”

Adam J. Levitin, Associate Professor of Law at Georgetown University Law Center opined that bankruptcy cramdowns are the only tool left to stabilize the foreclosure crisis. Mr. Levitin stated, “[b]ankruptcy courts are capable of immediately handling a large volume of filings, and the bankruptcy automatic stay would function like a foreclosure moratorium until cases could be sorted through.”

Proponent Against the Cramdown

Mark A. Calabria, Ph.D., Director of Financial Regulation Studies at the Cato Institute, stated that, “[i]t is not exploding ARMs or predatory lending that drives the current wave of foreclosures, but negative equity driven by house prices declines coupled with adverse income shocks that are the main driver of defaults on primary residences. Defaults on speculative properties continue to represent a large share of foreclosures. Accordingly for any plan to be successful it must address both negative equity and reductions in earnings. Cramdown fails on both accounts.”

General Comments

Richard Genirberg, J.D., M.B.A., M.A., who represents consumers and creditors in Chapter 7 and Chapter 13 bankruptcy cases offered that cramming down residential real estate loans would benefit his debtor clients. Also, Mr. Genirberg stated that, “[l]egislating cramdown of residential real estate would create a veritable ‘license to steal’ from mortgagees. Mr. Genirberg suggested Congress needed to decide what would be beneficial for the American economy.

The Ranking Member of the Committee, Senator Jeff Sessions (R-Alabama) opposes such cramdown provision. However, Senator Richard J. Durbin (D-Illinois) continues to press for mortgage cramdowns in bankruptcy. Congress is expected to break for recess in the second week in August, 2009.