Bankruptcy Cram-Down Off the Menu for Now

Thumbs downThe Senate last week voted down the Obama administration’s plan to amend the Bankruptcy Code to provide judge’s with the power to order “cram-downs” on principal mortgages. See our earlier feature, Obama Redesigns the Cram-down.

A dozen Democrats joined with the Republicans to defeat that particular provision of a new housing stimulus bill that would have allowed debtors to:

  • reduce the principal balance on a mortgage to the current market value, and
  • cut interest rates while keeping their homes.

Opponents to the measure are concerned that a record number of bankruptcy filings would drive up interest rates, and the resulting losses would deal a death blow to the already foundering banking industry. Another concern is the impact of giving judges the power to determine property values.

Proponents, including the AARP, feel the cram-down option is the right relief for mortgagors, many of whom shoulder no fault for the foreclosure crisis. Nearly 28% of homeowners in crisis are seniors.

Sen. Durbin, who first introduced the cram-down measure, vows to keep fighting for the amendment to current bankrupcty law.

Cram-downs are still available in certain circumstances for second-home mortgages and auto loans.

See more on Real Estate Financing.

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