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Anaheim Bankruptcy Lawyers Explain Mortgage Cramdowns

February 11, 2009

The finance industry may be dropping its opposition to proposed laws that could help homeowners in financial trouble avoid foreclosure. A Jan. 26 article from Asset Securitization Report says that while investment companies are very concerned about proposals to allow mortgage "cramdowns" in bankruptcy court, they also acknowledge that it could help stabilize the housing market in the long term, reducing short sales and foreclosures.

A mortgage cramdown is when a bankruptcy judge changes the principal owed on a loan. At the moment, bankruptcy judges may not do this for mortgages on primary residences, but they can change the amount owed on most other kinds of debt, including a mortgage for a second home. Congress wants to add primary homes to that list to stop the rising tide of foreclosures, especially those affecting homeowners whose loans are now worth more than their homes. The financial industry -- including mortgage holders themselves as well as holders of mortgage-backed securities -- has opposed similar measures for years, but took a serious blow when industry giant Citigroup dropped its opposition to cramdown legislation earlier this month.

Now, this article suggests, at least some securities analysts are seeing advantages in mortgage cramdowns. While lenders and investors would lose money in cramdowns, the article said, it's not likely to be more than they would have lost if the home went into foreclosure. Furthermore, analysts say loan servicers would be more likely to consider voluntary loan modifications if they knew they faced the possibility of a mortgage cramdown later on. And this could ultimately reduce foreclosures, the article suggested, which would help stabilize the housing market and put everyone back on the path to a better economy.

The financial world does still have objections to the law, including a belief that allowing mortgage cramdowns might actually drive more people into bankruptcy. Under this thinking, homeowners who owe more than the value of their homes might decide to file for bankruptcy just because they know a judge could change the principal they owe. As Orange County bankruptcy attorneys, we wonder how realistic this concern is -- after all, bankruptcy is a drastic, life-changing financial step that affects the filer's credit for years to come.

Nonetheless, we're glad that the financial industry might be willing to relax its opposition to this measure, which could help millions of homeowners keep their homes. In Howard Law's Santa Ana mortgage loan modification practice, we have found that it is nearly impossible for homeowners whose mortgages were securitized to negotiate a loan modification, because the owners of the loans are now many individual investors. Investors and lenders have every right to be concerned about protecting their profits, but when loan modification is no more damaging than foreclosure, it's not sensible to take another option off the table.

Howard Law offers legal services for homeowners concerned about their financial futures, including negotiation on clients' behalf for a loan modification, predatory mortgage litigation and counseling on a possible bankruptcy. If you're considering any of these options, contact us today or call 1-800-872-5925 for a free consultation.