Republicans Question Push for Principal Reduction at Fannie and Freddie

Republicans Question Push for Principal Reduction at Fannie and Freddie

May 1, 2012
home  |  chart of the day  |  blogs  |  bankruptcy code and rules  |  statistics  |  legislative news  |  volo


Republican leaders on the House Financial Services Committee today questioned whether the Federal Housing Finance Agency has the authority to reduce the principal on underwater mortgages, the National Journal reported today. They have also asked the agency for details about the Treasury Department's involvement in the debate. Committee Chairman Spencer Bachus (R-Ala.) and seven other committee Republicans, including all of the panel's subcommittee leaders, sent a letter today to the acting director of the FHFA asking about the agency's deliberations over allowing Fannie Mae and Freddie Mac to offer principal reductions. "We are writing to understand whether the FHFA can—and should—authorize Freddie Mac and Fannie Mae to forgive a portion of the outstanding principal on mortgages that qualify for relief under the Home Affordable Modification Program," the lawmakers wrote. They specifically asked for any views or analysis provided by Treasury about the potential costs and benefits of principal reduction to taxpayers and whether Treasury or any other entity within the Obama administration has provided views on whether the GSEs can offer principal reductions under the law. The FHFA oversees Fannie Mae and Freddie Mac, which were taken over by the government in 2008 to prevent their collapse; the government has since spent more than $169 billion to keep them afloat. Earlier this year, the administration made changes to its Home Affordable Modification Program, tripling the financial incentives for principal reduction and opening the option to Fannie and Freddie. The move has created a public-policy debate about what is in the best interests of distressed homeowners and of the taxpayers who ultimately bear the cost of rescuing Fannie and Freddie. The FHFA has said it has not completed its analysis and is deferring a decision about whether Fannie and Freddie should allow principal forgiveness as it continues to study the issue and consult with Treasury.


In the race to open offices throughout the globe and lure rainmakers to their ranks, some law firms willingly took on debt they expected to have no trouble paying—a once-safe bet that is now backfiring, according to the Wall Street Journal on Sunday. That is because firms looking to boost their profiles with offices in glamorous locations staffed with star attorneys didn't count on the economy tanking and the resulting slowdown in legal work. The past decade has seen the once-unthinkable dissolution and bankruptcy of a number of large corporate law firms. At least one other—New York giant Dewey & LeBoeuf LLP—is teetering on the brink of bankruptcy. As a result, an industry that has historically been perceived as a low credit risk and attractive to banks is starting to see cracks in that facade. "Law firms are no longer as safe an investment as they were," said Alan Hodgart, managing director of Huron Consulting Group's legal team. "The idea that a law firm can't collapse and go broke is gone." It is a dramatic shift in the landscape that experts say is making banks more closely scrutinize potential and existing borrowers, digging deeper into a firm's financial information, performance results and partner agreements. "Many law firms are now being put under the microscope by their banks," said bankruptcy partner Charles Tatelbaum of Hinshaw & Culbertson LLP. Greater scrutiny is also the product of significant uncertainty about the legal industry's near-term economic prospects, according to a 2012 outlook report from Citi Private Bank, the biggest lender to law firms. "That uncertainty will be exacerbated by both constrained growth in revenues and rising expenses," Citi said in a joint report with the Hildebrandt Institute, adding that this uncertainty "will pose significant challenges for many law firm leaders." If the challenges prove too great and a bank doesn't like what it sees, it can cast doubt on a firm's viability and chip away at partners' confidence in their leaders. It only takes a few defections to set off a domino effect. Click here to read the full article.


As of this past January, any bank operating in the U.S. with more than $50 billion in assets must have the business equivalent of a living will: plans for what to do in the event of catastrophe. Every well-managed business should have contingencies and ways to assess its health and viability. But the fact that the Dodd-Frank financial regulations require the largest banks to submit detailed plans for worst-case scenarios suggests that something is seriously amiss, according to a commentary by billionaire Warren Stephens in Sunday's Wall Street Journal. We need bank reform that addresses the root of the problem, said Stephens: Some banks are simply too big—for their own good, as well as that of investors, the economy and their customers. Banks that are national in scope are no more immune to financial and capital problems than regional banks. The regional bank failures of the 1970s and '80s had a significant impact on the investors in those institutions, but they did not cause a national financial crisis. The reason is simple: The banks were not so large that the banking system, the FDIC and other agencies could not deal with them. Today, we see the opposite. Five institutions control 50 percent of the deposits in this country. They are definitely too big to fail. In a capitalist economy, there should be no such entity, said Stephens. We should promote competition and innovation in the financial industry, not protect an oligopoly. We need to place limits on banks and cushion the economy against future shocks. Click here to read the full commentary.


If your child is one of the 1.5 million high school students eagerly awaiting acceptance letters from colleges, you may be thinking that the average annual cost of a four-year institution now exceeds $20,000. Or that outstanding student-loan debt surpasses $1 trillion. Or that defaults are rising, economic growth is sluggish, and unemployment for those aged 20 to 24 is about 13 percent. Although we shouldn't exaggerate the risks of student debt, there are a few steps we can take to ease the burden—and possibly improve higher education in the process, according to a Bloomberg commentary on Thursday. Although a college loan remains a smart investment for most people, some students take on more debt than they can expect to repay. As a result, more than 5 million borrowers are past due on a loan account. So the first step should be increasing transparency in a dreadfully complicated market. Legislation recently introduced in the Senate, the Know Before You Owe Act, would require private lenders to confirm that borrowers are enrolled, give them regular updates on their loans and their accruing interest, and report annually to the Consumer Financial Protection Bureau. The second crucial step is to mitigate the burdens of already distressed borrowers. Finally, moving toward a more widespread income-based repayment model, in which debtors pay more as their salaries increase, would make economic sense and could help rationalize the student-loan system. This could be done partly through the Bankruptcy Code. Tying dischargeability to the average salary of graduates of a given school could offer a useful corrective. This way, lenders would start to avoid schools that aren't increasing students' earning power. Such a market solution could help weed out fraudulent schools, and it could push students away from expensive institutions that underdeliver educationally and toward schools that offer more value. Click here to read the full commentary.


Over the past decade, major airlines have figured out how to use the Bankruptcy Code to accomplish what they have never been able to at the bargaining table: reduce wages and benefits to "market" levels. Back in the days when fares and routes were regulated by the government and compensation was effectively set in an industry-wide pattern, there wasn't much incentive for airlines to resist above-market wages, gold-plated benefits and inflexible work rules. Even after the industry was deregulated and the major carriers faced competition from lower-cost, non-union upstarts, the threat of a crippling strike gave the airline unions the upper hand in contract negotiations. But bankruptcy has changed all that, according to a commentary in Saturday's Washington Post. Suddenly, airline executives discovered a way to unilaterally abrogate their labor agreements, fire thousands of employees and impose less-generous pay and more flexible work rules. Indeed, the technique proved so effective that several airlines went through the process more than once. The tactic effectively neutralized the unions' strike threats. All of which makes what is happening at American Airlines deliciously ironic, according to the commentary. Late last year, American finally decided to join the rest of the industry and make its first pass through the bankruptcy reorganization process after failing to reach agreement on a new concessionary contract with its pilots' union. The company hoped to win speedy court approval for a plan to eliminate 13,000 positions, reduce benefits to current employees and retirees and reform work rules that have made American's productivity the lowest in the industry. Instead, the unions did an end run and struck new labor agreements with US Airways, which will use it as the basis for launching a bid to buy its larger rival out of bankruptcy. If the gambit succeeds, the unions will not only wind up with more jobs and higher pay than American was offering, but also enjoy the satisfaction of seeing American's top executives tossed out on the street. Click here for the full commentary.

Be sure to tune in to ABI's Labor and Employment Committee webinar on "Evolving Issues in Chapter 11" on May 23 from 2-3 p.m. ET. The expert panel includes Babette A. Ceccotti of Cohen, Weiss & Simon LLP (New York), Jeffrey B. Cohen of Bailey & Ehrenberg PLLC (Washington, D.C.), Marc Kieselstein of Kirkland & Ellis LLP (New York) and Ron E. Meisler of Skadden, Arps, Slate, Meagher & Flom LLP. Issues to be discussed include:

• Hostess' efforts to eliminate their multi-employer pension plan contribution liability through motions to reject their labor agreements under Section 1113.
• Kodak's attempt to terminate retiree health benefits.
• The effect of the automatic stay upon efforts by the U.K. Pension Protection Fund and the U.K. Nortel Pension Plan to enforce its powers under the U.K. Pensions Act.
• American Airlines' efforts to reduce legacy costs in bankruptcy.

Click here to register.


Americans increased their spending more slowly in March, a sign that scant pay increases may be causing consumers to become more cautious, the Associated Press reported yesterday. Consumer spending rose 0.3 percent last month, just one-third the increase in February. Slow wage growth and softer consumer spending gains are the latest evidence that the economy might be weakening after a strong first two months. "Real" income—income adjusted for inflation—has been growing too slowly to sustain healthy increases in consumer spending, many economists say. After-tax income rose just 0.6 percent in the first three months of 2012 compared with a year earlier. That was the smallest gain in two years. "Real incomes will need to grow at a faster rate to prevent consumption growth from slowing," said Paul Dales, senior U.S. economist at Capital Economics. Before the Great Recession, a healthy gain in consumer spending was between 5 percent and 6 percent a year. March's increase was roughly half that pace. The savings rate edged up to 3.8 percent in March, after dropping to a 30-month low of 3.7 percent of after-tax income in February. Income, adjusted for inflation, inched up just 0.2 percent after declining for two straight months. A healthy job market could reinvigorate consumers because more jobs mean more money to spend. But the economy created just 120,000 jobs in March—half the pace of the previous three months. Click here to read the full article.


The U.S. Trustee Program has re-opened the comment period until May 21, 2012, on proposed guidelines for reviewing applications for attorney compensation in large chapter 11 cases ("fee guidelines"). The USTP also scheduled a public meeting for June 4, 2012, at the U.S. Department of Justice in Washington, D.C. on the proposed fee guidelines. Click here for more information on submitting comments or attending the public hearing.



Summarized by Bodie Colwell of Consumer Bankruptcy Fee Study

Affirming the bankruptcy court, the Bankruptcy Appellate Panel (BAP) found that both the record on appeal and the law of Puerto Rico amply supported the bankruptcy court's rejection of the allegations of the complaint and its conclusion that Scotiabank's lien was subordinated to the ownership interests of the timeshare holders. The BAP agreed with the bankruptcy court that it was indeed "clear from the documents, taken as a whole, that [the debtor] intended to transfer interests in real property to the purchasers and that the purchasers intended to acquire an interest in real property."

Nearly 500 appellate opinions are summarized on Volo typically within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI’s Volo website.


The Bankruptcy Blog Exchange is a free ABI service that tracks 35 bankruptcy-related blogs. A recent blog post discusses the possible negative outcome for loan servicers financing condos due to new Fannie Mae rules regarding condo association fees.

Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.

ABI Quick Poll
The debtor-in-possession model has proven too susceptible to abuse; a trustee should be appointed in every chapter 11 case, at least as a check on a DIP with more limited management authority. Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.


INSOL International is a worldwide federation of national associations for accountants and lawyers who specialize in turnaround and insolvency. There are currently 37 member associations worldwide with more than 9,000 professionals participating as members of INSOL International. As a member association of INSOL, ABI's members receive a discounted subscription rate. See ABI's enrollment page for details.

Have a Twitter, Facebook or LinkedIn Account?

Join our networks to expand yours.




NYCBC 2012
May 9, 2012
Register Today!





ABI'S "Evolving Labor Issues in Chapter 11" Webinar
May 23, 2012
Register Today!


May 15-18, 2012
Register Today!


June 1, 2012
Register Today!


CS 2012
June 7-10, 2012
Register Today!


NE 2012
July 12-15, 2012
Register Today!


SE 2012
July 25-28, 2012
Register Today!


MA 2012
August 2-4, 2012
Register Today!


- New York City Bankruptcy Conference
     May 9, 2012 | New York, N.Y.
- ABI Labor and Employment Committee's "Evolving Labor Issues in Chapter 11" Webinar
     May 23, 2012

- Memphis Consumer Bankruptcy Conference
     June 1, 2012 | Memphis, Tenn.
- Central States Bankruptcy Workshop
     June 7-10, 2012 | Traverse City, Mich.



- Northeast Bankruptcy Conference and Northeast Consumer Forum
     July 12-15, 2012 | Bretton Woods, N.H.
- Southeast Bankruptcy Workshop
     July 25-28, 2012 | Amelia Island, Fla.

- Mid-Atlantic Bankruptcy Workshop
     August 2-4, 2012 | Cambridge, Md.

ABI BookstoreABI Endowment Fund ABI Endowment Fund
Article Tags: