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'Cramdown' Vote Delayed in House

The House has postponed a scheduled vote today on legislation that would have allowed bankruptcy judges to modify the mortgages of troubled homeowners, The Post's Renae Merle reports.

Under the provision, a judge would be able to lower the principal of homeowner’s mortgage and the interest rate and extend the terms of the mortgage, a process known as a “cramdown.” Judges are already allowed to do this for vacation rentals but not a borrower’s primary residence.

The measure faces fierce opposition from the financial services industry and some Republicans, who say it could lead to higher mortgage rates and wider losses for banks. Not to mention take a step toward threatening the concept of contract validity.

The provision is a key part of a housing package being put together by Congress to codify changes to housing policy called for by President Obama. It includes changes to Hope for Homeowners, a government program to refinance troubled homeowners into more affordable loans that has failed to gain traction.

The package also includes a provision to shield lenders from lawsuits by investors if they modify troubled mortgages.

The safe harbor provision has been called for by the industry.

-- Frank Ahrens
The Ticker is Twittering!

By Frank Ahrens  |  February 26, 2009; 12:06 PM ET
Categories:  The Ticker  | Tags: cramdown, mortgage workouts  
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Allowing a cram down would "threaten contract validity"? BS. These people are in bankruptcy. The whole idea of bankruptcy is to restructure people's obligations. As the article notes, cramdown is already allowed on vacation homes, so why not primary residences? This has nothing to do with contract validity and everything to do with lenders not wanting to face up to the consequences of their bad underwriting decisions.

Posted by: greenmountainboy | February 26, 2009 2:45 PM | Report abuse

The free market, it will make lenders «face up to the consequences of their bad lending decisions». $500,000, they lent $500,000 to some buyer, he can pay the 2 percent «teaser» rate for eighteen months, then the loan «resets» to 10% and he cannot pay, the lender forecloses, all the lender can get on the free market is $200,000, the lender, he loses $300,000, it serves him right, he did not take care to pick a borrower who could pay back the loan. The lender gets what he deserves.

If the lender sold the loan to some investor, the investor loses lots of money, he took the risk to get that 10% interest, now the buyer cannot pay 10%, the investor loses, that is the risk he took, he loses, too bad, the investor gets what he deserves.

The new buyer, he gets a house, it was probably not worth more than $200,000 to begin with, it sold to the first buyer for $500,000 only because cheap money with no credit check made the $500,000 loan available, it is worth $200,000 now, it goes to the second buyer who can afford $200,000, he gets what he can afford, he gets what he deserves.

Millions of people, they live in rented apartments because they have no down payment, they cannot afford a standard fixed-rate mortgage at going rate, they rent because that is all they can afford, so it is all that they deserve. The first buyer, he cannot make the payments on the $500,000 loan he agreed to, he loses his house to foreclosure, he has to rent like all the other people who have to rent because they cannot afford to buy, he rents, that is what he can afford, that is what he deserves, he gets what he deserves.

«Cramdown», it means the first buyer gets to live in a house he cannot afford, why is he any better than all the millions of renters who have to live where they can afford?

Posted by: abu_ibrahim | March 4, 2009 1:45 PM | Report abuse

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