It is clear that that lending industry has been slow to confront the ever-widening foreclosure crisis that began to pick up steam in 2007. Indeed, Sandor E. Samuels, the former chief legal officer of Countrywide Financial was quoted as saying "We are going to keep making these loans [subprime teaser loans] until the last second they are legal." Samuels’ comments seem to reflect some of the general industry denial about the problem. Despite such denial, many have been advocating changes that will help address the crisis.
Last month, Arizona Attorney General Terry Goddard, along with twenty one other Attorneys General sent a letter to the U.S. House and Senate leadership urging an amendment to the bankruptcy code that would permit federal bankruptcy courts to order loan modifications, also known as "cramdown authority" in Chapter 13 bankruptcies. The Attorneys General are advocating broader authority in the bankruptcy courts to stem the foreclosure tide.
However, the lending industry has been actively lobbying against granting such cramdown authority, which they argue would reward irresponsible borrowers and result in higher borrowing costs. The general intransigence is perhaps better explained by the accounting nuances involved in allowing wide-scale modifications. Aubrey Cohen has a good blog post that describes how the securitization of loans has complicated the process.
Nonetheless, Citi recently dropped its opposition to cramdown authority, but has stood alone among the lending industry. One is left to wonder whether Citi was pressured into such a stance given that it has come to the Treasury trough twice in recent months for bailout funds. Meanwhile, the Mortgage Bankers Association recently launched a "Stop the Bankruptcy Cram Down Resource Center" to try and ward off any further attempts to empower the bankruptcy courts to force modifications. Time will tell whether the banks are able to ward off continued congressional pressure to force modifications. No small task.