Cram Downs Fade Away

Four months ago they were just about the only part of the new Administration’s foreclosure policy that seemed to be going anywhere.

Last week “cram downs” died a quiet death in the Senate, victim of an effective campaign by the banking lobby and the success of the Administration’s own Making Home Affordable program.

Current Federal bankruptcy law excludes mortgages from bankruptcy proceedings, but cram down legislation would allow judges whose primary goal is to keep defaulting families in their homes to modify mortgages.  Lenders were terrified that judges would be able to change loan terms and cut the principal on a mortgage to a house’s current market value or less.

When cramdown legislation passed the House in January, a widely-cited report from Moody’s claimed 1.7 million foreclosures nationwide could have been prevented.  That report, however, was written before the Obama program was created.  Designed to help 4 to 5 million homeowners strengthen their financial position through refinancing, and 3 to 4 million homeowners at risk of default modify their loans to a level that they can repay.

Under the new program, a defaulting homeowner can get his mortgages reduced to 31 percent of his total income for five years.  Interest rates can go as low as 2 percent and terms extended up to 40 years to meet that goal.  Secondary loans are modified in tandem with primary loans, down to one percent interest for five years.  Plus borrowers who stay current get $1,000 a year for five years incentive payment from the government for primary loans and $250 a year for secondary loans.

That’s a better deal than many borrowers would get from a bankruptcy judge.  Plus you don’t have to declare bankruptcy and ruin your credit for seven years.

With $75 billion being spent to make troubled homeowners whole, it made little sense to most senators to punish lenders and their investors with cram downs to help the relatively few borrowers with credit so bad they won’t qualify for the Obama program.  As President Obama himself put it, some people just shouldn’t be homeowners.

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