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Wednesday, September 09, 2009

Mortgage Cram Downs: The Return

by Calculated Risk on 9/09/2009 12:10:00 PM

From Ryan Grim at the HuffPost: Cramdown Is Back: Banks Against Homeowners, Round 2 (ht Atrios)

House Financial Services Committee Chairman Barney Frank (D-Mass.) tells the Huffington Post he plans to revive the effort to give bankruptcy judges the authority to renegotiate home mortgages -- by making it part of this fall's much-anticipated financial regulatory reform bill.
On Tuesday, Frank was asked by HuffPost if he had plans to readdress cramdown. "Yes, as I will announce tomorrow, and I told this to bankers, given the slow pace of modifications, for whatever reason: they're not putting enough people on it, they're not taking it seriously, there are legal obstacles. As of now my intention would be to include the bankruptcy on primary residences in the reg reform."
For a history of mortgage Cram Downs, and why they are needed, see Tanta's Just Say Yes To Cram Downs . Some excerpts:
The prohibition of court-ordered modifications for mortgages on principal residences was created in 1978; between 1978 and 1993 most bankruptcy courts interpreted the law to mean that while interest-rate reduction or term-extension modifications were not allowed, home mortgages could still be crammed down.

In 1993, with Nobleman v. American Savings Bank, the Supreme Court held that the prohibition on modifications of principal-residence mortgage loans also included cram downs. The result is that borrowers who are upside down and who have toxic, high-rate mortgages are simply, in practical terms, unable to maintain their homes in Chapter 13.
I am fully in favor of removing restrictions on modifications of mortgage loans in Chapter 13, but not necessarily because that helps current borrowers out of a jam. I'm in favor of it because I think it will be part of a range of regulatory and legal changes that will help prevent future borrowers from getting into a lot of jams, which is to say that it will, contra MBA, actually help "stabilize" the residential mortgage market in the long term. Any industry that wants special treatment under the law because of the socially vital nature of its services needs to offer socially viable services, and since the industry has displayed no ability or willingness to quit partying on its own, then treat it like any other partier under BK law.
There is much more in Tanta's post.

Cram downs are in important step: as Ryan Grim notes in the HuffPost article, the mortgage modification programs are all "carrot" and the cram downs will provide a "stick", and more importantly, as Tanta noted, the cram downs will bring discipline to the mortgage industry.