“Cram downs” gaining favor in foreclosure prevention

As I wrote in my last BLOG entry, the new administration foreclosure prevention program encourages lenders to reduce mortgage principle by up to 30% (called a “cram down”) in order to bring payments down to manageable levels for people who are in danger of foreclosure.

It was only a few months ago that the Senate nixed a bill that would allow bankruptcy judges to do cram downs on residential mortgages in the same way that they do them now on second homes, investment properties and even yachts.  But the failures of most lenders to modify their mortgages and the continued increase in foreclosures, more and more people are coming round to something I have said many times:  You need to cram down the mortgage principle if you want to prevent foreclosures.

Over the weekend, Martin Feldstein, an important economic adviser to both Reagan and Bush, produced his own plan for cram downs in the Wall Street Journal.  I’m not going to get into details because in my opinion the plan is totally unrealistic (for one thing he wants to keep mortgages at 120% of the current value of the house), but Feldstein does recognize that when people owe more on their mortgages than their house is worth, they have reduced motivation to keep making payments.

I think as I have thought all along, that the best way to do this is to let bankruptcy judges reduce mortgage principle down to 90% of the current value of the home.    Bankruptcy judges know how to do this, and until the late 70’s they had the right to do cram downs on residental mortgages.  It worked.

Congressman Barney Frank has said that if the banks do not start modifying  more mortgages more quickly then he will reintroduce the bill that would let bankruptcy judges do cram downs.  I wish he would do that anyway.  This problem is not goig to solved until cram downs become the standard,

Meanwhile if you need a mortgage loan modification, the best thing to do is work through one of the FREE (do NOT pay for this service) counselors approved by the federal government.

A list of local counselors is available from HUD.
You can also get names of approved  counseling organizations from the Hope website or by calling the HOPE HOTLINE at 888-995-4673.  The Neighborhood Assistance Corporation does this work too.

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