Is mortgage cram-down legislation inevitable?

WASHINGTON – Jan. 6, 2009 – It is growing increasingly likely that judges will get the power to rewrite mortgages for homeowners facing bankruptcy, some analysts say.

Currently, judges can modify personal loans and mortgages on vacation homes, but they can’t change mortgages on primary residences.

The banking industry has been fighting what is known as mortgage cram-downs because banks would have to absorb the losses. And the National Association of Home Builders has been on the side of banks.

But with Democrats about to control Washington and as voluntary foreclosure-prevention programs continue to fail, the likelihood of the passage of bankruptcy-reform legislation increases.

“To the extent that nothing else is working, bankruptcy cram-downs are becoming more likely,” says Rod Dubitsky, head of asset-backed-securities research at Credit Suisse.

Proponents of cram-downs say that investors are more likely to agree to loan modifications prior to foreclosure and bankruptcy if modifications after bankruptcy are inevitable. “You have to deal with the systematic problem of underwater mortgages or you are not going to stop foreclosures,” says Harvard University economist Martin Feldstein.

Feinstein proposes a plan that would replace mortgages that have negative equity with new, lower-cost loans. Mark Zandi, chief economist at Moody’s Economy.com would go even further. He proposes that the government spend $100 billion subsidizing the bulk of principal write-downs.

Source: The Wall Street Journal, Michael Corkery (12/31/2008)

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