Today, BusinessWeek correspondent Keith Epstein explained that the banking industry is lobbying the Senate to narrow the scope of proposed mortgage “cram-downs” — a bankruptcy reform that would allow judges to “cram-down” mortgage payments for troubled homeowners:
There still is activity right now, as we speak, really focused in some ways on the Senate and on moderate Democrats, such as Evan Bayh in the Senate, to try to lessen the impact of what’s coming. The industry pretty much accepts that cram-down is coming…The work is now focused on trying to limit the number of people whose loans will be eligible for that.
This is an important development, because mortgage cram-downs will potentially be a key part of a new housing plan that President Barack Obama will announce tomorrow. As The Wonk Room has noted before, cram-downs are essential to addressing the foreclosure crisis, because they help to get around the problems caused by securitization — the fact that mortgages have been chopped up and sold to investors around the world.
Rampant securitizing means that “the creditors are split into mind-bewildering tranches of differently securitized investors who have no way, or desire, to reach an agreement” to prevent a foreclosure. As US bankruptcy judge Samuel Bufford said, “there’s nobody on the lender side to do the deal unless you [get permission] from investors, and that’s impossible.”
Cram-downs enable judges to cut through all the junk and renegotiate mortgage payments, hopefully enabling more owners to stay in their homes. This — and not banks’ worries about potential losses — should be foremost in the minds of those in Congress that the banking industry is targeting.