House OKs Mortgage ‘Cramdown’ Bill; Tougher Fight Expected in Senate

A controversial bill that would give bankruptcy judges the power to reduce the principal balance on a debtor's personal residence passed the U.S. House of Representatives tonight but is expected to face a tougher fight in the Senate.

Under the "cramdown" legislation, bankruptcy judges could also reduce the interest rate and lengthen the term of a struggling homeowner's mortgage, reports the Washington Post.

Opposed by Republicans and the mortgage industry, which say it will unfairly lead to higher costs for all mortgage borrowers, the bill is described by proponents as a necessary measure to encourage lenders to work with the struggling homeowners and create a solid footing for the plunging economy.

Often, it is not in a lender's interest to foreclose, because the litigation process is expensive, and the lender eventually may get only a small fraction of what a home used to be worth, as it sits vacant, inviting vandalism, in a horrendous housing market.

However, because of the manner in which mortgages have routinely been sold to third parties in recent years—as part of "securitized" bundles that are fractionally owned by large numbers of investors—it can be very difficult or impossible for a mortgage servicer to get permission from investors to modify a homeowner's loan. Hence, the cramdown legislation is proposed to end this borrower-investor impasse.

Related coverage:

ABAJournal.com: "Bankruptcy Filings Up 31% in 2008; Mortgage Foreclosures Hit New High"