Marc's Mortgage Matter's

Whether you spell it cramdown, cram down, cram-down, or CramDown, the subject was in the news last week. Basically Citigroup reached a compromise with lawmakers to allow bankruptcy judges to modify terms of existing mortgages, and industry-wide legislation is probable. Both houses introduced bills allowing bankruptcy judges to permanently reduce mortgage balances to the property's fair value on principal residences, among other measures. Citigroup’s agreement, in addition to addressing existing mortgages and not future loans, permits bankruptcy modifications as long as filers previously contacted their lender in an attempt to secure a loan modification prior to filing (for new filers) or requesting the mortgage be modified in bankruptcy (for existing filers).

The Mortgage Bankers Association, and others, opposes the issue, due to the many issues that are unresolved and the destabilizing affect on the market. The industry’s concerns are well based. Losses from bankruptcy cram downs could be significantly larger than servicer-driven modifications, and the potential for high plan failure rates could further increase losses and charge-offs without stemming foreclosures or accelerating a housing recovery. Bankruptcy filings could double or more, increasing credit card charge-offs. Some fear a massive sell-off that would worsen valuations, threatening further balance sheet write-downs. Although it is believed that less than 1% of existing mortgages would be impacted, industry experts feel that cram-downs lower whole loan valuations. Since mortgage and home equity loans are, on average, 40% of large banks’ loan books, CramDowns of principal would lower that value, hurting bank equity. Home equity loans are in the first loss position in a cramdown scenario, and it is believed that for many borrowers bankruptcy could become a more attractive option, accelerating default rates.