No mortgage cram-downs for buyers in bankrtuptcy

Delinquent homeowners in bankruptcy who were also hoping to achieve principal reductions and other loan modifications from bankruptcy judges are sure to be disappointed in the Senate's decision to vote down the measure. Still, the law only prevents such cram-downs for principal homes, and allows judges to enact measures for vacation homes and investment properties. In other words, maybe move out, treat it as an income property and THEN file? From a CNNMoney.com story:

The Obama administration lost a bid to add a powerful weapon in its fight against foreclosure Thursday, after the Senate voted down a proposal to allow bankruptcy judges to modify mortgages.

The defeat left many housing advocates questioning the effectiveness of the president's loan modification plan. The so-called cramdown provision, which would allow judges to reduce mortgage principal, would have put pressure on servicers to modify loans before borrowers file for bankruptcy...

Bankruptcy reform was a key part of Obama's foreclosure prevention plan, which was introduced in mid-February. It aims to encourage servicers to be more aggressive in modifying loans through a mix of carrots, in the form of incentive payments, and the stick of cramdowns. Servicers have come under fire for not helping enough homeowners through voluntary initiatives...

Servicers covering 75% of the nation's mortgages are now participating in the modification program, which calls for banks to lower troubled borrowers' monthly payments to 31% of their pre-tax income. Many major servicers said they have beefed up their loan workout departments to handle more calls.

However, most just started accepting applications, so experts say they won't be able to judge the program until the fall at the earliest. By then, hundreds of thousands of borrowers could lose their homes...

Citigroup approves of mortgage cram-downs

In a move that could set the stage for other large lenders to follow suit, Citigroup has announced its support of legislation to allow bankruptcy judges to alter the terms of mortgages, including reductions of principal. From a New York Times story:

In a move that would help troubled homeowners, Citigroup agreed to support legislation that would let bankruptcy judges adjust mortgages for at-risk borrowers, leading Congressional Democrats said on Thursday...

Members of the House and Senate said Citigroup had agreed to drop its opposition, providing no future mortgages are covered by the law.Citigroup, which is receiving more than $300 billion in bailout assistance, says that it is open to measures that would help homeowners...

The revised bill that Citigroup endorsed would allow bankruptcy judges to adjust the principal payments or interest rates on existing loans. Judges could also extend the terms on mortgage loans, according to the language of the bill, which would force lenders to take losses without a say in bankruptcy court proceedings...

No other bank has broken ranks with the industry on the proposed bill. Mr. Durbin said he hoped the move by Citigroup, should other banks and financial trade associations take the same stance, would lead to backing by enough Democrats and moderate Republicans to push the bill through.

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Will 2009 be the year of mortgage cram-downs?

The pressure to allow bankruptcy judges to modify loans on principal homes is continuing to grow as voluntary measures by lenders to make existing mortgages more affordable to homeowners in arrears is continuing to build. With the new Obama Administration taking office in just a few weeks, pundits are thinking that allowing judges to make these modifications -- including 'cramming' down the principal and forcing lenders to take the loss -- will be part of the next stimulus plan. From a Wall Street Journal story:

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.

Even staunch opponents acknowledge that mortgage cram-downs for primary residences are likely to be as part of Congress's economic-stimulus package in early 2009. The National Association of Home Builders used to reject any bill with a cram-down provision outright. Now it is saying the measure is worth a look...

The latest embattled foreclosure-prevention program is Hope for Homeowners, which was approved by Congress last summer and supposed to help 400,000 homeowners. Only 357 people have signed up so far for the voluntary program. The Department of Housing and Urban Development, which is administering the program, acknowledges that it has been encumbered by high fees and narrow eligibility requirements.

Another government program, FHASecure, was intended to help 80,000 homeowners who had fallen behind on their payments after their adjustable interest rates reset. It has helped only 4,100 delinquent borrowers refinance since September 2007 and will stop taking new loan applications as of Wednesday.

Mortgage lenders also are modifying tens of thousands of loans without government help. But often this hasn't solved the problem. A report last week by the Office of the Comptroller of the Currency and the Office of Thrift Supervision found that nearly 37% of mortgages modified in the first quarter of 2008 were 60 days or more delinquent after six months.

"It is absolutely clear that voluntary modification is just not working," says Rep. Brad Miller, a North Carolina Democrat. "Every plan that Congress has passed, we do it and nothing happens."...

Proponents of bankruptcy reform also note that millions of troubled loans aren't being addressed by current modification programs because they were carved up and sold to investors as securities. Mortgage servicers have been reluctant to aggressively modify these loans because they have been unsure of their legal rights.

The mere threat of mortgage cram-downs could break the standoff between mortgage servicers and mortgage investors, which has slowed aggressive loan modifications. Investors may be more willing to go along with industry-driven modifications when facing the threat that a judge could ultimately order the amounts of loan principals reduced, forcing them to eat bigger losses...

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