"Cram Down" Power Could Be Given To Judges

December 17th, 2008 by BankruptcyCorner

A proposal to grant bankruptcy judges the power to modify the terms of troubled mortgages may be gaining momentum after one trade group removed its objections to such a move.

Representative John Conyers Jr. (D-Michigan) introduced a bill earlier this month that would give bankruptcy judges the power to "cram down" mortgages after the National Association of Home Builders said it would no longer oppose the proposal.

"Cram down" refers to lowering the payment and principal on mortgages where the home’s value is less than the amount owed. The proposal was pulled from the bailout bill passed in September after the home builders’ group, the Mortgage Bankers Association and other real-estate industry groups expressed grave reservations.

Mortgage bankers say that mortgage rates would rise up to two percent for all mortgages if the power were given to bankruptcy courts.

Jerry M. Howard, chief executive of the home builders’ group, said that in this housing crisis, "old doctrines don’t necessarily fly."

Howard was quoted in a Los Angeles Times story by Peter Y. Hong as saying "The situation has deteriorated so much, (that) every proposal needs to be considered."

Builders, who are competing with a flood of foreclosed homes on the market for sales, will not oppose the court-ordered modifications, according to Howard.

Conyers’ proposal will allow bankruptcy judges to lengthen loan terms to 40 years, reduce mortgage principal, waive prepayment penalties and stop or modify interest rate changes on adjustable-rate mortgages.

No action was likely on the bill until the next congressional session after the first of the year.