Interest Rate Roundup

Thursday, January 08, 2009

Mortgage principal cramdowns to get the green light?

Interesting news out late today: Lenders (led by Citigroup) are caving in to the idea of allowing bankruptcy judges to "cram down" principal balances on mortgage loans. This sensible idea has been fought tooth and nail by the banking and mortgage lobbies. They have argued that mortgage lenders would have to charge higher rates on future loans to price in the risk that a loan they make will be crammed down in the future.

More from the Wall Street Journal ...

"Citigroup Inc. signed onto a deal with top Democrats in the Senate to move forward with a measure that would allow judges to set new repayment terms for millions of mortgage holders who wind up in bankruptcy court, senators involved said.

"The accord on the Senate version of a bill allowing "cramdowns," when bankruptcy judges force lenders to modify mortgages, was negotiated by Sen. Dick Durbin, the Senate's second-ranking Democrat and the author of the Senate bill. Sen. Durbin, who has backed pro-consumer bankruptcy initiatives for years, has worked for more than a year on the cramdown bill.

"The deal, Senate staffers said, is likely the first of several measures being crafted this year that propose to trim the principal owed by homeowners saddled with mortgages larger than the current value of their house. It marks a surprising change of direction by the financial-services industry. Banks have consistently fought such legislation, saying cramdowns, would raise borrowing costs for all home buyers and jam courts with homeowners who would not otherwise declare bankruptcy.

"This is the breakthrough we've been waiting for, to have a major financial institution support this legislation will create an incentive for others to come our way," Sen. Durbin said in an interview. "I want to congratulate Citi for being open-minded about this [and] playing a major leadership role."


  • This has to be the way to go.

    But I'm mystified - is Citigroup speaking on behalf of the lending industry? Or has some previously unknown part of government got its hand up their ass?

    By Anonymous Anonymous, at January 8, 2009 at 5:36 PM  

  • Might this create a perverse incentive?

    Parents from this era will someday tell their children to be sure to get their foot on the property ladder with a nice "starter cramdown".

    By Anonymous Anonymous, at January 8, 2009 at 8:22 PM  

  • I read that the cramdowns only applied to mortgages entered into before the enactment of the bill. Still, it sets a dangerous precedent and I don't see how it cannot drive up interest rates for everyone. The part I haven't figured out is how to cram down the mortgage.

    By Anonymous Anonymous, at January 8, 2009 at 10:40 PM  

  • This is of course anecdotal. My co-worker (making ~180k/yr) stopped paying his mortgage 2 months ago. This is on a 320k house - well within his financial limits. He eats out 6 nights a week, nice wine etc. Goes to the casino regularly.

    His line is "it's my obligation as a consumer to take advantage of the programs I'm paying for".

    If he is in fact eligible for this type of load modification I think its just awful. It's not just people who are struggling to keep out of the cold, at all. Makes me feel the sucker, once again.

    By Anonymous Anonymous, at January 9, 2009 at 12:20 PM  

  • Perhaps this is part of Citi's payment for the TARP funds it received, who knows.

    What bothers me more is that congress is "negotiating" with the financial institutions who were largely responsible for the crisis in the first place. That has a number of implications that don't sit well at all.

    By Anonymous Anonymous, at January 9, 2009 at 8:00 PM  

  • I want Citi to lower my principal too. Why should the profligate get all the gravy?

    By Anonymous Anonymous, at January 20, 2009 at 9:19 AM  

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