Cram Downs Approved By House
The House is looking over an economic stimulus package right now, and as it does that a House panel has also been examining the merits of cram downs. The findings? Cram downs should help the economy. Now, of course, Congress hasn’t exactly been doing a bang up job with the economy, considering how the $7 trillion spent so far on economic stimulus has been little more than wasted. But cram downs might actually help prevent foreclosures.
What are crams downs?
Essentially, cram downs are when bankruptcy judges force lenders to reduce the principal on a loan. This has been happening in cases of other types of debt for quite some time. But mortgage lenders have managed to be excluded from this practice by virtue of the fact that they lobby really well. Now, though, with the powers that be recognizing that some of the blame (but certainly not all) for the housing market mess can be put on mortgage lenders who approved loans they shouldn’t have, cram downs are becoming an issue.
The idea is to allow bankruptcy judges to modify loan terms and reduce the principal on home mortgage loans for those who are in danger of foreclosure. In order to take advantage of this, however, the borrower much let the mortgage lender know about the intention to file for bankruptcy at least 15 days in advance. Additionally, borrowers who sell the home within 5 years of any cram downs have to share some of the gains with their mortgage lenders.
Pros and cons of cram downs
This should prevent some foreclosures, since it will allow bankruptcy judges to force changes that the borrower can afford. Additionally, another side effect should be to force mortgage lenders to better consider the loans they offer.
On the downside, pickier mortgage lenders will not approve as many people, and the housing market may not get moving as quickly as some may like. And, of course, cram downs are likely to result in even more losses to mortgage lenders.
