One of the economic turn around proposals being kicked around includes legislation allowing bankruptcy judges who preside over Chapter 13 bankruptcies to reduce the principal amount of mortgages. This is being dubbed the “cramdown” of the mortgage principal into a smaller amount. A friend of mine received an electronic pamphlet from her credit union extolling the dangers of such legislation (Senate Bill 61 and House of Representatives Bill 200):
The bill contains “cramdown” legislation which would allow bankruptcy judges to lower the balance of an existing mortgage loan to the property’s current market value, reduce the interest rate and/or extend the loan maturity. On the surface, this sounds great; however, we believe the deeper unintended consequences have the potential for devastating impact on American consumers like you, who are paying their obligations. Here’s why.
This “cramdown” provision is not limited to the predatory loans that caused the current housing crisis-it applies to all
mortgages. We fear the legislation is too broad and will allow even those not struggling with paying their mortgage to seek
a “cramdown” through bankruptcy. As a result, there’s a strong likelihood that some of your neighbors, with similar homes
and similar obligations to your own, could have their mortgage balance slashed to a fraction of what you paid for your
home. While this seems unfair in and of itself, imagine the ripple effect years from now when the real estate market appears
to have recovered and you want to sell your house. Your neighbor with the “cramdown” mortgage balance will be able to
sell their home (at a profit) for less than you still owe-thereby continuing to depress property value (but only for the folks
who made good on their mortgage obligations).Senate Bill 61 and House of Representatives Bill 200, titled “Helping Families Save Their Homes in Bankruptcy Act of 2009;’ has a wonderful feel-good name; however, the bills have the potential to do deep and lasting damage to the economy.
The unintended consequences to our members and consumers in general from this legislation include:
- Increasing the cost of obtaining a mortgage loan as a result of higher interest rates
- Increasing the difficulty of qualifying for a mortgage loan due to stricter credit criteria and down payment requirements
- Penalizing responsible homeowners by lengthening the property value recovery period
- Rewarding individuals for reneging on their financial responsibilities despite their ability to pay
A viable legislative solution should not serve as incentive for homeowners to stop making payments and file bankruptcy,
nor should it give bankruptcy judges the authority to value real estate.
I’m not sure I agree that the sky is falling. Here is my list of reasons:
- Under US banking regulations, credit unions are not allowed to issue first mortgages, only second mortgages or equity lines of credit secured by real estate. This rule was made to “level the playing field” and not promote unfair competition between mortgage companies and credit unions. Does the cramdown legislation apply to second mortgages or only first mortgages? From reading the bill, I’m not sure.
- The cramdown legislation does not apply to a Chapter 7 bankruptcy filing, only Chapter 13 filings. I question the main assertion here – are people really going to file a Chapter 13 bankruptcy to reduce the principal of their mortgage? I am not so sure – in a Chapter 13 BK, the consumer must pay back all their debts under court supervision. In addition, you must qualify for any Chapter 13 bankruptcy programs. I don’t think there will be a rush to file bankruptcy. The consequences to credit ratings alone will stop most people (ruined credit for 7 years minimum.)
- In addition, if the home is foreclosed upon, current figures of the percentage of the loan which lenders recoup is less than 50%. The proposal is estimating that the average reduction through the courts is 28% (where they got this figure, I do’t know, to be fair).
- The mortgage balance would then be spilt between the “new” principal of the mortgage and the “unsecured” part of the mortgage. Should the homeowner sell their home for above the reduced mortgage principal, they would be required to pay the “profit” back to the mortgage holder.
- Currently, both bills in the House and Senate are being modified. Some of the new provisions may include allowing only sub-prime loans to be eligible for cramdowns, which addresses one of the fears in the flyer.
The credit union industry may well be crying wolf on this one. And it has yet to pass either branches of Congress.
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You are full of it!!!!!! Our economy is going
into a Depression, and people are losing their jobs. Vote yes for H.R. 1106 allowing people
to save themselves in Bankrupcy court.
It’s about time. It will save our country,
because we cannot handle anymore forclosures.
I think you might not have read the whole article. I am for the cramdown legislation.
Who are you trying to kid? Since when are the banks concerned about the people…..you make me laugh.
Bank losses on foreclosures at best might equal any cramdown amount, given the current market and the costs to banks of foreclosures.
No complaints from the banks when they were receiving unreasonable fees, commissions, etc. while pushing the adhoc and innovative (but oh so profitable to the bank) mortgages programs which were oftentimes far above the comprehension of some consumers.
Banks WON’T be hurt by this….it’s only existing mortgages.
You’re just upset you can squeeze any more juice out of we lemons.
If rich people like Donald Trump can file chapter 13 and continue to “be rich” then I think the same laws should apply for those who only have one home, if the property is no longer worth the price one paid, then I think the judges should be able to reduce the mortgage to market value. In my case, my home is worth almost 100,000 less than I paid and I had a 70,000 deposit. If I walk away, I lose my 70,000 deposit, that was every dime I had, not one penny left in my bank account. With a loss of 6000.00 income, I have been struggling to keep up the high mortgage payment. My only thought when I bought it was, well I can always sell it if I cannot afford it anymore, but oh no, my house is not even worth what I owe. So Yes, vote for the cramdown, I only hope it passes immediately.
I bought a home in a new subdivision, I was the first one there, I paid 275,000 for my house, I put down 70,000 after closing costs I owed about 209,000. Now my house (not being brand new anymore) is worth 180,000, I lost a job, cannot sell my house as I would never get back my deposit. Being self-employed, I owed back IRS taxes of 3000.00, which was an error on my part, however, they put a levy on my bank account and took every dime I had. By the way, more than 1000.00 was in interest and penalties carried over from 2006. Anyway, 3 more homes have sold in my subdivision, the first one a few months after I bought mine sold for 250,000, another one recently in the 220,000 range. My question is if people like Barney Frank caused the housing problem, then why shouldn’t the judges be able to help people who are in my situation at least be able to stay in their homes. Because of the IRS levy, I had no choice but to seek an attorney’s help. Hey, I put 70,000 on my house, so I am not one of the people who are seeking help and did not use a dime of their own money.