“Cramdowns” – would give bankruptcy judges the power to modify the terms of mortgages for individuals who have filed for Chapter 13 bankruptcy protection. Judges would have the ability to reduce interest rates, lengthen loan terms, and cut principal payments on the residence. Note that bankruptcy judges already have this power on rental properties and on other personal property. This means that everyone who is upside-down on their mortgage would have the incentive to pay their reduced mortgages and keep their homes. This would mean fewer homes on the market for ready and available borrowers. Fewer homes on the market means that this would increase the values of homes. The net affect is to economically make a cramdown unnecessary because the loans are equal to what the homes are ultimately worth.
However, the banks and others see a cramdown provision as a threat. They believe that it would be particularly detrimental for young individuals. They claim that banks and credit unions would be forced to raise interest rates to cover borrowers who file bankruptcy and lend only to the people who have several years of solid credit history. While it may be true that it would raise interest rates, the only reasonable response is . . "SO WHAT!" This means that it would be harder for the banks and lenders to give away loan money like it was candy. Afterall, this is exactly why we got into this mess.
Adam Levitin, an associate professor of law at Georgetown University has done significant research into mortgage modifications agrees with me. He also stated, “The question is not whether bankruptcy modification will result in losses,” he said. “It will. The question is whether these will be greater losses than lenders will incur in foreclosure, which is the only real alternative.” He further stated that "Mortgage modifications in bankruptcy offers unparalleled advantages over other potential solutions. It is the only solution that costs taxpayers nothing, it makes borrowers and lenders share the pain.”
Senator Dick Durbin's press secretary Max Gleischman is absolutely right. He said, “Doing nothing and letting the current housing crisis let itself play out has done more to drop home prices than a change in bankruptcy law will." I have to agree with him!
