Cram-Downs Pass House Panel; Head to Vote

The House Judiciary Committee on Tuesday approved a measure for so-called “cram-down” provisions that would allow bankruptcy judges to change the terms of a mortgage by reducing the interest rate, extending the life or lowering the principal or loan balance as part of a bankruptcy debt restructuring plan. The bill passed the panel’s approval 21 to 15, according to a report by the Washington Post Wednesday. The measure is headed for a full vote in the House next, before going to the Senate, and appears to be moving quickly through Congress. The version of the proposal passed by the Committee bears a few changes from the original version, notably: the cram-downs are eligible only for existing mortgages and require that borrowers contact their lender at least 15 days before filing bankruptcy, a provision Citigroup Inc. (C) required before it would throw its weight behind the bill, according to a report by the Wall Street Journal. Also, the proceeds of any property sold within five years must be shared with the lender, and borrowers proven to have committed fraud to obtain their loans are restricted from eligibility. Reports began circulating in early January that the Senate’s version of the forthcoming economic stimulus package would include these cram-downs. Democrats have long advocated allowing judges to modify principal amounts of mortgages on primary residences in Chapter 13 bankruptcy cases filed by debtors; currently, such modifications are precluded by law. In contrast, Republicans and most industry groups have strongly opposed so-called “debt cram-down” proposals for mortgages, saying that allowing cram-downs would add to the costs of a mortgage for most consumers and swell the ranks of borrowers filing for bankruptcy protection. Key industry analysts have been suggesting that allowing so-called cramdowns to take place will likely lead to further significant write-downs in an already battered secondary mortgage market — leaving banks with even larger-than-expected holes on their balance sheets. Analysts at Bank of America Corp. (BAC), while suggesting on Jan. 13 that such provisions would likely lead to a spike in bankruptcy filings, also said that aspects of the proposed bankrupcy law would serve to limit potential investor losses. Write to Diana Golobay at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.