Cramdown the Meltdown To Prevent Foreclosures

January 14, 2009

With foreclosures skyrocketing, and property values tanking, the housing market may not rebound in any reasonable amount of time unless somebody does something drastic. Enter the cramdown bill.

Essentially, the cramdown writes off the overvaluation of your property, reducing the principal to a more ‘real’ worth. FDIC chairman Sheila Bair is using cramdowns in many of the loan modifications the government is doing for IndyMac borrowers.

Now a Senate bill could help as many as 800,000 homeowners with underwater mortgages by granting them new leverage in renegotiating their loans. The bill would modify bankruptcy laws by allowing judges to lower principle and interest rates and to extend the terms of the loans – something they have been unable to do in the past.

Currently, many homeowners are strapped to mortgages they can no longer afford and powerless to renegotiate them under bankruptcy law. About half of Chapter 13 filers ultimately lose their homes because they often are required to make higher monthly payments than they did prior to bankruptcy since reorganization plans must include missed payments plus any penalties.

The cramdown dill would apply to all mortgage loans, including subprime, written any time prior to the bill’s date of enactment but only for homeowners who have filed for Chapter 13 bankruptcy protection.