Mortgage “Cramdown” Notion Appears to Gain Appeal
By Däna Wilkinson, Attorney at Law on Dec 12, 2008 in Uncategorized
In the last few weeks support for changing bankruptcy laws to allow bankruptcy judges to modify home mortgages appears to be growing. Not only does the foreclosure crisis appear to be deepening, but voluntary mortgage modifications are not working. There seems to be inadequate incentive for mortgage companies to modify loans on their own, and a need for a solution that will work quickly, and without spending taxpayer dollars. Today MSNBC.com has a lengthy article noting that there are still major hurdles and red tape surrounding attempts to modify mortgages. The article is worth reading in its entirety, but this is particularly striking:
Some housing advocates believe Congress should reconsider a more sweeping proposal that was voted down in early versions of this summer’s housing relief bill — a change in the bankruptcy law to allow judges to modify loans from the bench.
….
The lending industry, with strong support on Capitol Hill, has vigorously opposed what it has described as a “cramdown” provision. Lenders argue that the risk of a bankruptcy filing would increase the credit risk of writing new mortgages, making them more costly and difficult to win approval from underwriters.
But proponents argue that lenders are already dealing with that risk and pricing it into the cost of new loans. And if they aren’t taking that credit risk into account, they should be, according to Georgetown University law professor Adam Levitin, who specializes in bankruptcy law.
“Had that been the case, we never would have gotten into this mess,” he said. “Bankruptcy has a strange effect. When creditors have to take into account bankruptcy risk they have to take into account credit risk. When they think there’s no bankruptcy risk, they stop paying attention to credit risk. This can help correct against that.”
Well said, Professor.
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