The mortgage "cramdown" legislation working its way through Congress would lower foreclosures by 20% and stabilize the housing market, says a report released by Credit Suisse Jan. 26. According to Reuters, the investment bank said the possibility of a cramdown by a bankruptcy judge would give lenders an incentive to work out loan modifications on their own, especially modifications of the principal owed. With "a large percentage of delinquent borrowers" poised to benefit from the legislation, this would reduce the number of foreclosures by a fifth, allowing housing prices to return to equilibrium.
A mortgage cramdown is the industry's name for when a bankruptcy judge reduces the amount of principal homeowners owe on a loan. Currently, this is allowed for almost all other kinds of debt, including mortgages on second homes, but not for mortgages on primary homes. Lenders are free to do this voluntarily but rarely do so, in part because it cuts into profits. More recently, lenders have been shy about voluntary mortgage loan modifications because so many mortgages were bundled into investment securities and sold to investors. It's very difficult to change the terms or principal on this kind of mortgage because investors rarely grant permission, and could even sue banks that they believe hurt the value of their investments.
A bankruptcy cramdown is one way to avoid this problem -- if the homeowner files for bankruptcy. But if the Credit Suisse report is right, homeowners may not have to, because banks will be newly inspired by cramdown legislation to negotiate a loan modification outside of bankruptcy. That's good news for people with mortgage problems, particularly people who took out loans whose value is now higher than the value of the home. For most homeowners, bankruptcy means ten years of substantial credit problems and three to five years on a strict budget and repayment plan, with their financial lives controlled by a court-appointed trustee. This legislation would allow our Southern California bankruptcy clients, and millions of other homeowners, the possibility of keeping their homes without this drastic step.
At Howard Law, we specialize in helping consumers handle all kinds of overwhelming debt, including mortgage debt. If your mortgage payments are no longer realistic for your budget, our Orange County loan modification lawyers can represent you in negotiations with lenders for a change in your interest rate, your principal or other terms. And we offer free, confidential consultations to potential clients, so there's no risk in speaking to us about your situation. To set up a free consultation, call us as soon as possible at 1-800-872-5925 or contact us online.