AOL NEWS: Speaking of courts, a primary part of the foreclosure crisis — the scarcity of meaningful loan modifications — relates to a problem with current U.S. bankruptcy rules. A debtor in bankruptcy can force a bank to accept a write-off of principal and term modifications for certain kinds of loans, in a process called a “cram down.” A cram down allows the judge to revalue the secured loan to the present market value of the asset — a change that would be crucial to so many underwater homeowners. The remainder of the debt doesn’t disappear, but it becomes unsecured, and only gets paid off the way other unsecured debt, e.g. credit cards, does. Cram downs are available for car loans, yacht loans, vacation homes, investment properties — almost any secured asset imaginable. Almost any except one — the mortgage on a primary residence.
Cram downs aren’t available to save the homes of the millions of Americans who only had enough money to buy one house. Why not ? Because banks told Congress horror tales about what would happen if the dreaded cram down option was extended to primary residences. But new research from the Cleveland Federal Reserve shows those claims are grossly exaggerated. According to its analysis, none of the nightmares banks forecast came to pass in the context of allowing cram downs to save family farms. Instead, banks avoided cram downs by making meaningful mortgage modifications with the farmers. Indeed, cram downs of primary home mortgages were allowed nationally until 1978 and in some jurisdictions through 1993, when a U.S. Supreme Court decision eliminated the practice. So it’s not as if the American residential market has no experience with cram downs…
Some in Congress understood how useful cram downs could be to solve the crisis, but were unable, after bitter fighting, to make cram downs an option for primary homeowners: Too many in Congress sided with the banks instead, and the Obama administration never took up the cause. Perhaps now that the banks’ fraudulent document problems have been exposed, Congress can try again… (more)
