Congress is Trying to Change the Bankruptcy Code to Allow Cram Downs in Mortgages
March 10, 2010 5:08 am BusinessJohn McCain has specifically rejected mortgage cram down in bankruptcy, but his economic plan proposes the very same concept in a non-bankruptcy setting. These are the Barney Frank/Chris Dodd elements. Why he has such an aversion to a chapter 7 bankruptcy solution is confusing, but his plan cannot work without it.
Opponents of bankruptcy filing cram down argue that it will discourage lenders from writing residential mortgages. Currently, a home mortgage is the only exception to the “cram down” rules, which have been in existence for decades. Cram down has long been used on automobiles without affecting the public’s ability to get low interest loans for cars because, when it comes to automotive financing, lenders are more cautious.
In our current economic situation, there is no question that cram down is a necessary economic mechanism to ensure banks are making wise loans. Everyone agrees that banks have been writing bad mortgages, resulting in the collapse of the housing market. Had there been an exception for cramming down homes, there would have never been 100% or more financing of homes.
In 2005, the ability to cram down car loans was restricted by amendments to the bankruptcy code, and the immediate result was lenders increasing car prices and rolling negative equity and trade-ins into the new loan. Now, many more Americans are upside down in their cars.
So, bankruptcy cram down does not just help those who file bankruptcy. This mechanism ensures stability in the economy by forcing lenders to act responsibly.
Letting people keep their homes and allowing cram downs has many significant benefits. First, they will restore cash flow to the mortgage-backed securitized trusts. This results in cash flow payments on the securities issued by those trusts, with the resulting payments to the insurance companies, money market plans, retirement plans and investment who bought them. The payments even go to the tax payers, after all, the TARP funds bought an awful lot of these securities from companies like AIG and Fannie Mae.
