Wednesday, December 12, 2007

House Considers Cram Downs

by Tanta on 12/12/2007 08:47:00 AM

Thanks to Buzz for the link:

(Washington, DC)- The House Judiciary Committee will consider a substitute version of the Miller-Sánchez “Emergency Homeownership and Mortgage Equity Protection Act of 2007″ during a markup TOMORROW, December 12, at 10:15 a.m. in room 2141 of the Rayburn House Office Building. The substitute reflects a compromise made with Rep. Steve Chabot (R-OH) that will help hundreds of thousands of homeowners save their homes from foreclosure while seeking bankruptcy to reorganize their debts. . . .

The key features of the compromise, to be offered by House Judiciary Committee Chairman John Conyers and Rep. Chabot are as follows:

· It targets existing nontraditional (e.g., interest-only) and subprime mortgages originated after January 1, 2000 up through the legislation’s date of enactment.
· It applies to debtors who file for chapter 13 bankruptcy relief (a form of bankruptcy relief by which individuals restructure their debts) who lack sufficient income after payment of specified expenses pursuant to IRS guidelines to remain current on their mortgages and cure arrears, as required by current law. Debtors who so qualify may:

· reduce exorbitant mortgage interest rates and avoid onerous prepayment penalties;
· set aside excessive and often secret fees charged by unscrupulous mortgage lenders ;
· modify the principal amount of the mortgage to reflect the home’s actual value.
I'm strongly in favor of changing Chapter 13 to allow cram downs on owner occupied mortgages; I waxed crisply on that subject a while ago.

I think putting in these restrictions to try to limit this only to "predatory" mortgages is futile, and eventually we'll get the possibility of cram down for everyone. It's hardly a free-for-all; you do have to declare Chapter 13, live on the payment plan, and get the judge to agree to the adjusted loan terms, all that being a great deal more onerous a process than getting any workout from any mortgage servicer has ever been. I figure that once Congress does manage to realize that we're all sublime subprime now, there will be an amendment to let folks with a good old 30-year fixed have the same treatment in BK that anyone else can have.

What really annoys me is that this doesn't apply to future mortgages, only to those made between 2000 and the enactment of the law. To me, cram downs are important not just as a relief measure for debtors but as a disincentive for lenders relaxing credit standards too far. If you know a judge can rewrite your mortgage, you may well write it more carefully up front.

I conclude that two things are operating here: "bipartisanship," or your basic committee product that will make nobody happy all the time; and a desire to believe that this is "contained" to a certain class of borrowers and can be "worked out of the system" without impacting the prime world.