Mortgage Cramdowns: Back in 2009 ?

     Proposals to allow mortgage "cramdowns" --basically empowering bankruptcy judges to order principal or payment reductions-- died in the fall when the idea was dropped from the federal economic rescue package.

    Cramdowns were favored by many congressional Democrats, however, as well as folks like former Treasury Secretary Lawrence Summers, now a top Obama economic adviser. Cramdown supporters now think they have the juice to see passage of legislation authorizing such bankruptcy reform next year. Here's today's Times story.

    Supporters of cramdowns say the policy is the most effective way to stop foreclosures. Opponents, most prominently the Mortgage Bankers Assn., say the cost to lenders will result in higher interest rates for everyone.

--Peter Y. Hong

Comments

[Tim K.]

Here's an interesting analysis problem: Which is going to produce bigger/fast price drops: cramdowns with principle reduction and reduced foreclosures, or no cramdowns and more foreclosures?

The cramdowns will increase interest rates for future buyers, which will increase the monthly payments required for a certain size house, which, in turn will mean home prices have to go down to match the monthly payment people can afford.

Increase foreclosures will reduce the number of homes for sale which will increase supply and competition, which will prices.

I personally think that foreclosure increases will mean that home prices will move in a "wave" from cheaper areas to more expensive areas, kind of like the effect we're been seeing for the past two years. Foreclosure are locally individual houses.

Cramdowns will affect everyone in all areas equally *at once* because lending is nationwide, and thus will get more expensive nationwide. This will reduce home prices evenly across the board.

[shouldntbeblogging]

That is correct!
Higher interest rates are what we need. Higher interest rates equal lower home prices. Just because interest rates go up that doesn’t mean that all of the sudden people can afford increased monthly expenses! Why does it seem that no one gets that? If people can't afford the houses prices must drop. Right now the government is buying down interest rates to below what the market (private investors) can hold to artificially hold prices high. This must stop so that the natural forces can lower home values quickly to where they should be. Look at Riverside. Lower prices = sales! Let the prices fall and let them fall fast. Rip the band-aid off! It will be less painful that way. The government can only hold rates down for so long. What happens when they stop? Buying at a low interest rate in an increasing interest rate environment is madness. Buying at a high interest rate in a decreasing interest rate environment is genius.

Wait...

[mark g]

they could not have come up with a more appropriate name as we who are responsible will be on the receiving end of the "cramdown"...

[Laker]

THAT IS THE PROBLEM. Since interest rates on mortgages are (artificially) low, it doesn't make sense to lend money (from investor side) in the long run. Inflation will eat away the mere interest.
However, if investors would be "allowed" to charge higher interest rates, they will get more interested to lend that money as their margins and profits will be higher. That will however decrease home price substantially which is great for buyers but terrible for sellers.
It is great for those that place to retire in 20-30 years as their property tax base will be low.
I much better buy a $200,000 at age 30, with 9% interest than a $800,000 at 4.5% at age 30.
After 30 years, the property tax (in CA) would be so high that there will no way to retire and pay $2000 every month in taxes...

[Nick]

I'd be really wary about giving private loans if I were a bank now; no surprise that they've basically stopped lending. With all the rumblings about cramdowns, foreclosure suspensions, and punishing evil banks, and the incoming anti-business administration, even if you can find a qualified borrower you're very likely to get screwed by the government changing the rules. If I were the banks, I'd be looking at Treasuries, even with a 0% return, while you try to push as many foreclosures through as possible while you still can, and triage as many private loans (house, car, credit cars, etc.) as you can before you're forced to eat losses on them, regardless of how sound the loan was when we had a free market.

... oh, that's right, that _is_ what's happening. Carry on.

[syscom3]

Considering the ammount of damage the mortgage bankers have inflicted on the world the is past two years, I think their credibility is in the gutter.

Cramdowns are great idea!

[MyLessThanPrimeBeef]

It's not the nuclear option, but I am for the enema option.

We need to flush out the system. Everything politicians have proposed so far merely continues the clogging when we should be inducing the riddance of toxic waste.

[Nelcisco]

Mortgage Bankers Assn. says the cost to lenders will result in higher interest rates for everyone, no win situation for lenders, higher interest rates will really keep potential borrowers away, especially now. I'm affraid '09 doesn't look very promising folks.

[jag]

This will only encourage more homeowners to purposely default in order to get their principal reduce. If I was 200K underwater and can still manage my mortgage payments I would purposely file bankruptcy to get the 200K writedown. Financially this make a lot sense because I will never be able to save that amount of money in 5 to 10 years. This is the period of time a bankruptcy shows in your credit. Oh and before I file for bankrupty I will maximize my credit cards and anything else that I can take advantage of. This is exactly what the government is encourgaging people to do.

[Jonathan]

So the republicans are good for something after all.

[james]

democrats are going to screw up big time - cramdowns - what a blunderhead idea.