More On Cram-Downs

The Wall Street Journal reported that Citigroup reached a deal with top Senate Democrats on a measure that would allow judges to set new repayment terms for millions of mortgage holders who wind up in bankruptcy court. The deal is likely the first of several measures being crafted this year that propose to trim the principal owed by homeowners saddled with mortgages that are larger than the current value of their house. It marks a surprising change of direction by the financial-services industry.

What is a cram-down again?  In a cram-down, a judge modifies a loan, often reducing principal so a borrower can afford it. Lenders hate it because they have to absorb the loss. Bankruptcy judges currently have the ability to modify certain personal loans and even mortgages on vacation homes, but they can not cram-down mortgages on primary residences.

This is good news.  The reason is because a lender is going to be more willing to work with a borrower in foreclosure by reducing their principle, lowering the rate, etc. so that they don’t claim a Chapter 13 bankruptcy and have to deal with the bankruptcy judge.  This way we won’t have as many borrowers re-defaulting on their modifications.