Mortgage Cram-Downs Could Be Part of Stimulus Package

[Jan 2, 2009.]

 

The economic stimulus plan expected to be passed early this year could give bankruptcy judges the ability to alter mortgages on primary residences. In a “cram-down” a judge is allowed to reduce the principal on a loan to help borrowers afford the payments. Currently judges can modify personal loans and mortgages on second homes, but not on primary residences.

Lenders generally don’t view cram-downs favorably. Some have said that allowing mortgage cram-downs could result in higher interest rates and down payments as banks try to protect themselves from possible future losses. Mortgage companies also say that loans that have been modified by bankruptcy judges often have high default rates.

"We should be working on keeping people out of bankruptcy not pushing people into it," Francis Creighton, chief lobbyist of the Mortgage Bankers Association, told the Wall Street Journal.

Some mortgage companies are already working with homeowners to modify the terms of their loans. But according to a report by the Office of the Comptroller and Office of Thrift Supervision, about 37% of mortgages that were modified in the first quarter of 2008 were 60 days or more delinquent after only six months.

"It is absolutely clear that voluntary modification is just not working. Every plan that Congress has passed, we do it and nothing happens," said Rep. Brad Miller, of North Carolina.

However, the National Association of Homebuilders, which has traditionally been opposed to any bill that allowed for cram-downs, has said it’s worth considering them.

Rod Dubitsky, head of asset-backed-securities research at Credit Suisse, told the Journal that "to the extent that nothing else is working, bankruptcy cram-downs are becoming more likely."

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.