Citibank, Senate Agree On "Cramdown" Bill To Prevent Foreclosures

Ever heard of a cramdown? It’s when a bankrupcty court splits a home loan into two parts: a secured loan that’s equal to the current value of the home, and an unsecured loan that covers the rest of the outstanding debt. The secured loan is paid, and the unsecured isn’t. It can result in lower monthly payments (if the new loan amount is amortized over the course of the loan), but the important part is that it helps guarantee that a significant part of the loan will still be paid off.

You’ll probably hear it a lot more in 2009, because the Senate and Citibank have just reached an agreement to allow cramdowns for homeowners who have filed for Chapter 13 bankruptcy protection.

The WSJ writes:

Nearly 10 million homeowners are having trouble making their mortgage payments, according to Moody’s The proposed changes in bankruptcy rules could help as many as 800,000 troubled borrowers keep their homes, estimates Mark Zandi, chief economist at Moody’s

Lenders have been opposed to the idea because they obviously don’t want to make loans that can later be adjusted by a court, but with the risk of so many foreclosures on the horizon, they’re starting to see it in a different light, according to Forbes:

Schumer said he received calls Thursday from several banks – which he did not name – indicating their potential interest in supporting the idea.

“This is a breakthrough day,” the senior senator from New York said in a news conference on Capitol Hill. “We’ve been stymied because the banking industry opposed this simple provision, which is key to getting a floor to the housing market.”

A key provision of the bill is that the cramdowns would only be extended to borrowers who prove that they’ve asked their lender for a loan modification before filing for bankruptcy, and who received their loan before the bill goes into effect.

The senators behind the bill are going to try to attach it to President-elect Obama’s economic stimulus package, but there’s likely to still be plenty of opposition from the mortgage industry, so it’s not yet a sure thing by any means.

“Citi reaches deal with lawmakers on home loans” [Forbes] (Thanks to Snarkysnake!)
“Plan to Cut Foreclosure Rate Clears Key Hurdle” [Wall Street Journal]
(Photo: respres)

Want more consumer news? Visit our parent organization, Consumer Reports, for the latest on scams, recalls, and other consumer issues.