Mortgage ‘Cram-Down’ Provision Left Out Of Stimulus

Today, The Hill reported that some lawmakers are upset over the “tactical decision…to leave a bankruptcy ‘cram-down’ provision out of the economic stimulus package”:

Obama and Democratic congressional leaders say they strongly support it, but the financial industry and Senate Republicans oppose it. So the White House and Democratic leaders worry that making the provision part of the stimulus would complicate their efforts to build GOP support in the Senate.

This provision would allow bankruptcy judges to modify — or ‘cram down’ — mortgages payments “for homeowners who owe more than their home is worth.” Currently, bankruptcy judges are not able to modify loans on a primary residence (but can modify loans on second-home mortgages). Giving judges this power is critical to addressing the housing crisis, and should be included in the stimulus package.

According to a report in the Wall Street Journal, federal judges themselves “are eager to have the power to restructure mortgages for struggling debtors because it could save hundreds of thousands of homeowners from foreclosure.” As Samuel L. Bufford, a U.S. bankruptcy judge in Los Angeles explained, this provision “gets around the problem that many mortgages have been turned into securities and sold to multiple investors”:

The bankruptcy system depends on people making deals, but the deal-making piece of it has disappeared when it comes to mortgages because of the way mortgages were sold and packaged…There’s nobody on the lender side to do the deal unless you [get permission] from investors, and that’s impossible.

For what it’s worth, bailed out financial giant Citigroup also supports the measure, much to the chagrin of the banking industry.


In addition to helping distressed homeowners, speeding mortgage modification has a stimulative effect, thus meriting its inclusion in the stimulus bill. An interest rate reduction from 9 percent to 5 percent on a $150,000 mortgage would put more than $4,800 back in an American family’s pocket each year, which could be spent on consumer goods, increasing demand to fill the economy’s “output gap.”

As Mark Zandi, chief economist of Moody’s, wrote this week, the problems facing distressed homeowners “are clearly everyone’s problems.” It’s outrageous that steps such as these are still being debated so long after the housing crisis was obviously in full swing.

Mortgage payment calculations after the jump.

Using this mortgage payment calculator:

A $150,000 mortgage at 9 percent interest = $1,206.93/monthA $150,000 mortgage at 5 percent interest = $805.23/month

$401.70 saved/month = $4,820.40 saved/year