Why Cram-Down Must Pass

11/10/2009 05:12 am ET | Updated May 25, 2011

My hometown of Cleveland has long struggled with the closing of steel mills, the loss of manufacturing jobs, and rising unemployment -- but it was a punch in the gut to see our city featured in the New York Times magazine under the headline, "All boarded up: How Cleveland is dealing with mass foreclosures," in a cover story earlier this year.

The stories of blocks of boarded-up homes in the city's Slavic Village neighborhood are all too familiar, but the urgency to address this crisis has only intensified in recent months. Despite signs of economic stabilization, foreclosures continue to plague neighborhoods in Ohio and across the country at an alarming rate.

The delinquency rate on U.S. home mortgages reached a record high in the second quarter this year, rising to 5.81 percent nationwide -- that's up 65 percent, from 3.53 percent during the same period a year ago. Delinquencies of 60 days are considered a precursor to foreclosure, because of the difficulty for homeowners to come up with two months' worth of payments to get caught up.

Ohio has been especially hard hit. According to the Mortgage Bankers Association, one in seven Ohio homeowners are late on their payments or in some stage of foreclosure. That ranked Ohio the eighth highest state in the country for delinquencies, and the seventh highest for foreclosures.

Faced with such a serious threat to our neighborhoods, Ohio's state government has acted decisively, channeling $117 million in Neighborhood Stabilization Funds to help communities across the state by purchasing and redeveloping abandoned and foreclosed properties, establishing land banks, and demolishing blighted structures.

Despite our best efforts, the worst in the nation's housing market may still be yet to come. Even as we begin to see signs of economic growth, foreclosures driven by recent layoffs and adjustable rate mortgages with rising payments will force many thousands more from their homes over the coming months.

Rampant foreclosures are one of the most insidious challenges we face today, and only the federal government has the ability to change the current dynamics that are fueling these trends.

While the Obama Administration has put forward a $75 billion initiative to stem foreclosures and help struggling homeowners modify their loans, this voluntary program makes only a small dent in the problem, helping around 200,000 Americans, while more than 5 million face foreclosure nationwide.

Big banks and the financial industry have benefited from more than $2 trillion in loans and low-interest financing through the U.S. Treasury and the Federal Reserve Bank's economic recovery efforts, yet these powerful institutions have fiercely resisted efforts by progressives like Congressman Barney Frank andSenator Dick Durbin to use the bankruptcy code to modify loans and keep families in their homes.

It is now clear that the Administration's plan and other voluntary efforts that merely encourage mortgage lenders to modify loans and avoid foreclosure are not sufficient. I believe it's time for aggressive action to stop the torrent of foreclosures that are flooding our neighborhoods, posing a dangerous threat to our overall housing market and the very fabric of our communities.

It is time to provide bankruptcy judges the power to alter loan terms to allow families to stay in their homes. Such measures are commonly referred to as "cram-down," as they give a judge the ability to lower a homeowner's loan principal to match its current--and often drastically reduced--market value. This does not represent any more of a loss for the lender than if the foreclosed home was sold at present market value through foreclosure auction. The fundamental difference, clearly in the public interest, is keeping families in their homes.

You can take action in support of cram-down legislation by clicking here to contact your Members of Congress in Washington today.

Contrary to the arguments of many banks, lenders, and other special interests, this represents neither extraordinary government intervention, nor will it dramatically impact their bottom lines.

As they have done time and again, powerful interests have stalled efforts to pass such legislation. But as the tide of foreclosures continue to rise, we can wait no longer for Congress to act.

According to a Credit Suisse study, cram-down measures may only stop about 20 percent of all foreclosures. But this is a significant chunk of homeowners--likely more than one million families--who will have a chance to look for new jobs, pay down exorbitant medical bills, and reorder their finances, while keeping their homes in the process.

Foreclosures are, for many families, the ultimate indignity. Struggling with unemployment, expensive medical bills, or balloon payments they didn't know were coming, the dislocation of families can be traumatic.

But the impact doesn't stop there. Ripple effects can be felt throughout neighborhoods--lowering property values, causing blight, and destabilizing entire communities by encouraging squatters and fueling an increase in crime.

If the Administration's modification efforts and cram-down legislation don't yield clear results, a broader moratorium on foreclosures may be necessary while the economy continues to stabilize.

While we appear to have averted another Great Depression -- thanks in large part to the bold federal recovery plan -- the aftershocks of this deep recession will continue to be felt in Ohio's and America's neighborhoods for months to come. We cannot turn our backs on the millions of families still depending on us. The time to act is now, so I hope you'll click here to take action in support of cram-down legislation today.

Lee Fisher is Lieutenant Governor of Ohio and a candidate for U.S. Senate.