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Obama housing plan includes 'cram down'

President Obama unveils his latest plan for restoring the economy through government action later today in Mesa, Arizona, this time focusing on housing. The Department of Treasury has already posted an executive summary to go along with the announcement, and the President has indeed decided to include "cram down" provisions to let bankruptcy unilaterally modify contracts. From the executive summary:

Allowing Judicial Modifications of Home Mortgages During Bankruptcy for Borrowers Who Have Run Out of Options: The Obama administration will seek careful changes to personal bankruptcy provisions so that bankruptcy judges can modify mortgages written in the past few years when families run out of other options.
  • How Judicial Modification Works: When an individual enters personal bankruptcy proceedings, his mortgage loans in excess of the current value of his property will now be treated as unsecured. This will allow a bankruptcy judge to develop an affordable plan for the homeowner to continue making payments. To receive judicial modifications in bankruptcy, homeowners must first ask their servicers/lenders for a modification and certify that they have complied with reasonable requests from the servicer to provide essential information. This provision will apply only to existing mortgages under Fannie Mae and Freddie Mac conforming loan limits, so that millionaire homes don't clog the bankruptcy courts.

Thus, the sanctity of contracts no longer holds, and especially not for people with jumbo mortgages.

Todd Zywicki of the Mercatus Center at George Mason University testified last month in Congress on the topic. His testimony is available here, as summarized:

As the nation currently faces a foreclosure crisis of historic proportions with many homeowners in grave financial troubles, the desire to "do something" to address this crisis is understandable. It is thus tempting for law makers to amend the Bankruptcy Code to permit modifications of home mortgages since it appears not to require government expenditure. However, the cost of modifying mortgages in bankruptcy, known as "cram down" in bankruptcy lingo, will have enormous costs not only on aspiring future homeowners, but on any American who uses any kind of credit. This written testimony, prepared for submission to the House Subcommittee on Commercial and Administrative Law, elaborates that a "cram down" amendment will lead to an increase in the risk of home mortgage lending, and a dramatic increase in Bankruptcy filings, which will in turn have spillover effects on other consumer credit facilities.

See also Zywicki's February 13th op-ed in the Wall Street Journal, "Don't Let Judges Tear Up Mortgage Contracts."

UPDATE: The relevant legislation in the House is H.R 200, to amend title 11 of the United States Code with respect to modification of certain mortgages on principal residences. Sponsored by Rep. John Conyers (D-MI), the bill was reported out of the House Judiciary Committee on a 21-15 vote.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.