Pipeline: Case for Cramdowns

American Banker
August 19, 2010
Lepro, Sara
P. 6

Allowing bankruptcy judges to modify home loans may have helped stem farm foreclosures in the 1980s when farmers faced outstanding mortgage balances greater than the market value of their property and foreclosure moratoriums that proved to be ineffectual. In response, Congress passed legislation to allow stripdowns, now known as cramdowns, that would reduce the mortgage balance to the current market value of the farm and convert the remaining balance to an unsecured claim. Opponents then and now argue that such a change would flood the courts with bankruptcy petitions that could lead to higher mortgage interest rates. But according to economists at the Federal Reserve Bank of Cleveland, "the effects of that stripdown provision, in place for more than two decades, on the availability and terms of agricultural credit suggest that there has been little if any economically significant impact on the cost and availability of that credit." Data also suggests that the legislation "worked without working" because it led to an increase in private loan modifications. A similar bill has been introduced by Sen. Dick Durbin (D-Ill.) but has been held up since the beginning of the year, and his three prior attempts with similar bills have failed in the face of opposition from the mortgage industry and Republicans.
Web Link - May Require Paid Subscription