Mortgage ‘Cram-Down’ Provision Left Out Of Stimulus
Mortgage ‘Cram-Down’ Provision Left Out Of Stimulus
Today, The Hill reported that some lawmakers are upset over the “tactical decision…to leave a bankruptcy ‘cram-down’ provision out of the economic stimulus package“:
Obama and Democratic congressional leaders say they strongly support it, but the financial industry and Senate Republicans oppose it. So the White House and Democratic leaders worry that making the provision part of the stimulus would complicate their efforts to build GOP support in the Senate.
This provision would allow bankruptcy judges to modify — or ‘cram down’ — mortgages payments “for homeowners who owe more than their home is worth.” Currently, bankruptcy judges are not able to modify loans on a primary residence (but can modify loans on second-home mortgages). Giving judges this power is critical to addressing the housing crisis, and should be included in the stimulus package.
According to a report in the Wall Street Journal, federal judges themselves “are eager to have the power to restructure mortgages for struggling debtors because it could save hundreds of thousands of homeowners from foreclosure.” As Samuel L. Bufford, a U.S. bankruptcy judge in Los Angeles explained, this provision “gets around the problem that many mortgages have been turned into securities and sold to multiple investors”:
The bankruptcy system depends on people making deals, but the deal-making piece of it has disappeared when it comes to mortgages because of the way mortgages were sold and packaged…There’s nobody on the lender side to do the deal unless you [get permission] from investors, and that’s impossible.
For what it’s worth, bailed out financial giant Citigroup also supports the measure, much to the chagrin of the banking industry.
In addition to helping distressed homeowners, speeding mortgage modification has a stimulative effect, thus meriting its inclusion in the stimulus bill. An interest rate reduction from 9 percent to 5 percent on a $150,000 mortgage would put more than $4,800 back in an American family’s pocket each year, which could be spent on consumer goods, increasing demand to fill the economy’s “output gap.”
As Mark Zandi, chief economist of Moody’s Economy.com, wrote this week, the problems facing distressed homeowners “are clearly everyone’s problems.” It’s outrageous that steps such as these are still being debated so long after the housing crisis was obviously in full swing.
Mortgage payment calculations after the jump.
Using this mortgage payment calculator:
A $150,000 mortgage at 9 percent interest = $1,206.93/month
A $150,000 mortgage at 5 percent interest = $805.23/month
$401.70 saved/month = $4,820.40 saved/year
6 Responses to “Mortgage ‘Cram-Down’ Provision Left Out Of Stimulus”
Register
RSSLogin
Topic Cloud
ArchivesBlog RollAbout Wonk RoomContact Us
Donate
This bill is important but not a cure-all. It is only for chapter 13 cases. The “cram-down” won’t be effective unless the debtor completes his plan. The savings the debtor realizes from the cram-down probably will have to be paid to unsecured creditors under the plan. Chapter 13 plans have a high rate of failure. So lots of people who hoped for mortgage modification might not make it through the 3 or 5 years necessary under a plan. And valuation of the real estate for “cram-down” purposes might not be a simple snappy proposition, particularly in absence of a recent market for many residential areas. Not only that, but it is likely that the adjustment of the interest rate from the Federal Reserve Board of Governors index rate will vary considerably from place to place and from case to case. Lots of judges will determine the interest rate in many different ways.
What exactly will it mean that the debtor has been informed that it “may” be facing mortgage foreclosure? How much effort must debtor make to establish that a mortgage modification was not offered prior to bankruptcy.
I think this legislation is a very good idea but for it to work, it will need to be fleshed out more. It will need to be simple and mechanical so that it will be fast and efficient. There are too many mortgages and not enough time for complex court procedures.
January 23rd, 2009 at 9:00 pmYes, well, judges should be able to write-down principal sums, but the lenders should too, as just another homeowner subsidy for the time being, since it seems pretty clear that home prices and rents are likely to stabilize and eventually recover. I wish people would stop thinking in terms of the 30-year mortgage and start thinking at the timescales we need to amortize population shifts. The term length should be variable too, along with the principal sum.
January 23rd, 2009 at 10:55 pmIf a judge can not modify the value and terms of a primary mortgage in Chapter 13, people will just give up the property entirely. That will continue this downward progression of property value for far longer. The cramdown provision would keep people in their homes instead of adding them to the supply of unsold innventory.
January 25th, 2009 at 12:56 pmwell said JRTW. I am one of those “fence-sitters” you describe.. and I’ll be damned if I give any more of my hard-earned income to this toxic asset (and toxic lender for that matter). My home is roughly -90k in equity, AFTER my 25k down payment that has disappeared. I would rather ruin my FICO score (so i wont be credi.. i mean debt-worthy anymore.. who cares? sounds like freedom to me at this point!) HOWEVER, the truth in lending act is there to protect us, and if you’re interest rate was +1.5% more than prime at closing, and your appraiser was instructed to value the home at X to close, then you have a case my friends! don’t give up, these lenders need to pay for what they’ve done! If a professional of any category ignores best practice to achieve record profit, they should eat all losses associated with their greed.
January 26th, 2009 at 11:53 amThe most common mortgage modifications are listed below:
lowering the mortgage interest rate
reducing the mortgage principal balance
fixing adjustable interest rates within the mortgage
increasing the loan term throughout the mortgage
forgiveness of payment defaults and fees
or any combination of the above
Check out this public service site: http://mortgagemodificationinfo.org
February 1st, 2009 at 10:16 amIt also seems silly that the democrats left the cram down provision out of the plan so the Republicans would vote for with dems for the stimulus package. They didn’t vote for it anyway.
February 5th, 2009 at 5:33 pmScrew them and put it back in!