House OKs 'cram-down' compromise
Bill would let bankruptcy judges modify mortgages
By Inman News, Thursday, March 5, 2009.In a compromise intended to appease lenders, the House of Representatives today passed legislation that will allow bankruptcy judges to rewrite the terms of troubled borrowers' mortgages -- but only if they have first tried to work with their loan servicer to obtain a loan modification or other alternative to foreclosure.
The Obama administration considers so-called bankruptcy cram-downs a useful tool for encouraging lenders to participate in an initiative aimed at helping up to 9 million families restructure or refinance their mortgages (see story).
The House version of a bill that would amend the bankruptcy code, HR 1106, the Helping Families Save Their Homes Act of 2009, passed in a 234-191 vote.
Most of the opposition came from Republican members, although seven members of the Grand Old Party voted for the bill and 24 Democrats voted against it.
Further compromise may be required to gain passage of SB 61, a companion bill in the Senate, where Republicans opposed to cram-downs hold a greater proportion of seats.
The Senate bill's sponsor, Sen. Dick Durbin, D-Ill., has said he is considering amending the legislation to restrict bankruptcy judges' cram-down powers to subprime mortgages.
Critics say changing the bankruptcy code would flood courts with distressed homeowners, and raise the cost of borrowing by introducing new risks for lenders.
Cram-down supporters say those fears are exaggerated, as only those loans made in the past would be eligible for judicial modification, and lenders would step up their efforts to engage in workouts with borrowers to avoid having loan terms re-written in court.
HR 1106 includes language that would provide a legal "safe harbor" for loan servicers who modify loans and expand the scope of the Federal Housing Administration's "Hope for Homeowners" guarantee program for refinancings.
The Obama administration said it advocates "careful changes" to the bankruptcy code that would subject only those mortgages within Fannie Mae and Freddie Mac's conforming loan limits to court-ordered modifications.
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Submitted by Steve Hicks on March 6, 2009 - 7:53am.
Congress and the President have done more to prolong the housing recovery in 40 days than I thought possible. The cramdown is another ill thought out scheme that will cause more issues to deal with than the issues congress is trying to address. Changing a private contract to either partie's benefit or detriment is contrary to all rules of law. There will be abuse of this law if passed that will create so much more taxpayer exspense to bailout financial institutions. Washington, please stop helping the housing market!
Submitted by Matt Carter on March 6, 2009 - 8:43am.
Looking at the bill, it also encourages judges to extend the term or reduce the interest rate of a loan before reducing principal.
If the principal is reduced, homeowners would have to share sale proceeds with lenders if they later sell at a profit.
Bill's language on this point:
A claim may be reduced ... only on the condition that if the debtor sells the principal residence securing such claim, before completing all payments under the plan (or, if applicable, before receiving a discharge under section 1328(b)) and receives net proceeds from the sale of such residence, then the debtor agrees to pay to such holder not later than 15 days after receiving such proceeds--
`(1) if such residence is sold in the 1st year occurring after the effective date of the plan, 80 percent of the amount of the difference between the sales price and the amount of such claim as originally determined under section 1322(b)(11) (plus costs of sale and improvements), but not to exceed the unpaid amount of the allowed secured claim determined as if such claim had not been reduced under such subsection;
`(2) if such residence is sold in the 2d year occurring after the effective date of the plan, 60 percent of the amount of the difference between the sales price and the amount of such claim as originally determined under section 1322(b)(11) (plus costs of sale and improvements), but not to exceed the unpaid amount of the allowed secured claim determined as if such claim had not been reduced under such subsection;
`(3) if such residence is sold in the 3d year occurring after the effective date of the plan, 40 percent of the amount of the difference between the sales price and the amount of such claim as originally determined under section 1322(b)(11) (plus costs of sale and improvements), but not to exceed the unpaid amount of the allowed secured claim determined as if such claim had not been reduced under such subsection; and
`(4) if such residence is sold in the 4th year occurring after the effective date of the plan, 20 percent of the amount of the difference between the sales price and the amount of such claim as originally determined under section 1322(b)(11) (plus costs of sale and improvements), but not to exceed the unpaid amount of the allowed secured claim determined as if such claim had not been reduced under such subsection.
Submitted by Sean OToole on March 6, 2009 - 9:26am.
Steve - I wouldn't worry, it appears this legislation will only allow cram downs against those lenders who fail to offer the affordable payment loan mods that are part of the recent Obama plan. These mods do little to address the fundamental problem of negative equity and are a huge win for lenders vs. having to take a huge loss whether through foreclosure or other means. As such only the most delusional lenders are likely to find themselves in this situation.
The reality is that we won't return to a healthy housing market or economy until we deal with the $2-4 Trillion in negative equity that was built during the boom years. As prices are a function of income and loan terms it is unrealistic to expect prices to return to those levels except through wage inflation which is clearly a ways off. And lender that expects to be repaid in full for loans made during the bubble is delusional - whether now or later most of these loans will end in foreclosure as borrowers are forced to move due to job loss, illness, divorce or myriad other common life events.
That said, I agree that Washington is currently doing more to extend the crisis than to fix it. By putting in place plans that delay the elimination of negative equity, like payment based loan mods and foreclosure moratoriums, they are keeping natural market forces from clearing the bad debt that was run up in the bubble years.
Still, leaving the clearing of this debt to foreclosure alone is a far more painful solution than is likely necessary. While REAL bankruptcy cram down legislation is on the bottom of my list of solutions, it may still become a necessary stick in clearing the bad debt so we can return to a healthy housing market and economy.
Sean O'Toole
Founder / CEO
ForeclosureRadar.com
ForeclosureTruth.com
Submitted by Wenceslao Fernandez Jr, BS, Realtor, CDPE on March 6, 2009 - 9:53am.
I recently read/heard (can't remember) that cram downs have been part of the bankruptcy process on certain properties like, investment properties for some time.
My question is...if this is true and cram downs have already been allowed for investment property, how has this impacted the loans and lending practices of these types of properties?
I dare guess not much. Similarly, allowing cram downs on principal residences should not.
HOWEVER, the difference is in the sheer volume of cram downs that are likely to take place.
Yet, only those who qualify to participate in a bankruptcy to save their home will get this benefit.
Qualification is still restriced to income and other tests and it will not help everyone.
Therefore, I wonder how much volume of changed or crammed down loans will end up in this process? Perhaps, not many?
If this is the case, it should not affect rates or any other loan terms because the % of loans will not be enough to affect lending practices.
EXCEPT, it should help incentivise lenders and underwriters to CYA (cover their assets)!
Then, there will be no need or justification to penalize new borrowers for the mistakes these lenders and underwriters made in the past - they will just make more prudent loans going forward....or so the Administration HOPES.
But...who is controling that abuse due to panic by lenders does not spill over to pass on the responsibility or accountability of improper underwriting and lending practices is not being "crammed down" on consumers? I can't help but also answer...noone!
http://MiamiRealEstateKing.YourKWAgent.com
Certified Distressed Property Expert
Miami-Dade County, Florida.
Submitted by Barry Noble on March 6, 2009 - 6:44pm.
How much more damage are we to expect? $35 BPO's performed by agents doing 20 to 30 of them a day, according to their gleeful blogging, instead of independent appraisals. Now, Bankruptcy Judges deciding values and paybacks, instead of independent appraisals. AMC's controlling appraisals after April, taking up to 50% of independent appraiser's already low fees. How many small Loan Brokers and independent Appraisers now are(or soon will be) out of work and losing their homes? Barry Noble RE Broker and Certified Residential Appraiser in So California. http://www.MyPropertyIsWorth.com
Submitted by Rick Hardman on March 10, 2009 - 2:38pm.
I thought Obama was suppose to have all of this fixed by now. He has, afterall, been in office for over 40 days now. LOL
I agree with most of the sentiments stated above by others. I describe it like this:
We got into this mess by "robbing Peter to pay Paul". So now President Obama decides that the way to fix this is to do the same - "rob Peter to pay Paul". Brilliant! We think this is a bad economy - wait until our children are not able to take care of us in our old age because of the debt we strapped on their back.
bergen county real estatehttp://www.remax-nj.com/bergen-county-real-estate.aspx