Return of the ‘cramdown’
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Mortgage cramdowns -- expanding the power of bankruptcy judges to force loan modifications -- died in the last congress despite broad support among Democrats. Resistance to bankruptcy reform from industry foes has been slowly ebbing. Last month, the National Assn. of Home Builders said it was open to the idea, and now Citigroup is aboard. Here’s the Tribune story:
The agreement struck between congressional Democrats and Citigroup Inc. would permit bankruptcy judges to change the terms of mortgages as part of court-ordered debt restructuring. Democrats hope to include the provision in the upcoming economic rescue legislation under negotiation between Congress and the incoming Obama administration.The suggested change in the nation’s bankruptcy laws has been repeatedly proposed -- and defeated -- in recent years.Under Chapter 13 of the U.S. Bankruptcy Code, judges currently have the right to reduce the principal of auto, credit-card and other loans but cannot reduce the principal on a primary mortgage under any circumstances. As a result, homeowners who go into bankruptcy often wind up with mortgage payments that are even higher than the ones they had before, after skipped payments and other fees are added to the principal.Some housing experts and many Democrats blame this unwillingness to reduce the principal on mortgages for the difficulty that many homeowners have had as they try to modify their mortgages and avoid foreclosure.
-- Peter Y. Hong