I favor cramdowns for now, becauseLike the recently departed Tanta at Calculated Risk, I also favor the concept of cramdowns in mortgage foreclosure proceedings. It would bring balance to the negotiations, and discourage banks from making bad loans. If a bank could be forced to compromise during a foreclosure (odd because it is secured lending), the result could leave more homeowners in their homes, and with mortgages where the principal balances reflect current conditions.
In order for loan modifications to work, there has to be forgiveness of principal owed, though perhaps by granting the banks a part of the upside if the property is sold at a gain in later days. Forgiveness of principal allows the LTV ratio to remain whole, while reducing the payment at the same time.
But what does that do to the banks? The cramdowns cram immediate losses onto the banks. What if the actions of judges lead to the insolvency of banks? What if the possibility of future cramdowns lead mortgage rates to rise, in order to account for the risk? This is not a costless exercise in fairness.
Articles on the cramdown proposal:
- Lawmakers set new mortgage bankruptcy bill
- Stimulus Package to Include Cram-Downs: Report
- Banks to Lose a Security Blanket
- Plan to Cut Foreclosure Rate Clears Key Hurdle
I favor cramdowns for now, because it can be a win-win for the borrowers and banks. Leave the homeowner in place, who values the home, while making him pay something close to maximum sustainable monthly amount.
It makes the system more flexible, and at this point, that is a good thing.