More “cram downs” stopping foreclosures, but same players are making money on them

The same people who sold you a subprime mortgage you couldn’t afford are now calling many homeowners threatened with foreclosure to make an offer they can’t refuse.  They tell homeowners that they have bought the mortgage from the most recent owner of the paper at a big discount and they are ready and willing to share the profit by reducing the principle to a more realistic (and affordable) number.

I have been pushing for reductions in principle (“cram downs”) as the only way to solve the foreclosure problem since this disaster started.  I think the best way to do it is to let bankruptcy courts take these cases and lower the principle to current market value.  But the banks hated this idea and their lobbyists defeated it in Congress.

The Obama administration tried to get banks to lower principle with some special rewards (see our blog entry on Cram Downs Gaining Favor  in Foreclosure Prevention) but this has not been a huge success.

Now, at last, some banks are facing reality (according to the New York Times) and selling off their mortgages at prices often well under 50 cents on the dollar.  The firms buying them — often reincarnations of the firms that were involved in the sale of the subprime mortgages that got us into this mess — then do the “crams downs” and get the mortgages qualified for federal guarantees under the FHA program.  This makes it possible to package and resell the ew mortgages to investors, exactly as happened before, but with federal mortgage insurance to protect the investors. (Taxpayers on the other hand are much more exposed.)

Whatever is wrong with this plan, it is good news for those whose mortgages are in trouble.  The Times relates the story of an Hispanic couple in their 60’s who could no longer make the payments on their $440,000 mortgage.  They were making no progress on renegotiating their loan until one day they got a call from one of the companies buying these loans at a discount.  Before long their principle was reduced to $314,000, and they were able to make the new payments and stay in their house.

Comments are closed.