Bankruptcy Cramdown Mortgage Loan Modification? Key Banks Approve Possible Legislation

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By Admin on January 08, 2009 12:05 PM

Banks and the building industry are purportedly working together with Senators on "cramdown" legislation affecting bankruptcy judges' powers regarding mortgage loan modifications. The rule change would give bankruptcy judges the power to change repayment terms for certain homeowners who declare bankruptcy.

The Wall Street Journal reports that lenders including Citigroup are cooperating with key Senators on "cramdown" legislation to increase bankruptcy judges' power to modify the payment terms on primary home mortgages. As of last October, the WSJ reported that almost one in six homes was worth less than the value of its mortgage. "Cramdown" (or "strip down") refers to taking the value of a home's mortgage and cramming it down to the current value of the home.

Illinois Senator Dick Durbin introduced legislation including court ordered workouts of individual mortgages on Tuesday's first day of the new Congress. Endorsement of cramdown provisions by lending institutions could bode well for passage either separately, or as part of the anticipated Obama stimulus package. 

Previously, the financial and building industries lobbied vigorously against bankruptcy judges' having power to cram down mortgage terms, arguing that it would raise the cost of borrowing for potential home purchasers. "This is an about face for our organization," Jerry Howard, president of the National Association of Home Builders, told the WSJ. After government dedication of over $1 Trillion in attempts to rescue the financial sector, a new Congress hears increasing calls to do something to aid those facing foreclosure. Citigroup itself received over $45 Billion of fresh government capital.