How topical. I had to address this very issue on a law-school exam just two weeks ago. As a bonus question, our professor asked us to argue both sides of the issue. Should judges be allowed to engage in mortgage cram downs? Why? Why not? Cram downs, for the uninitiated, are judicial write downs. It would allow bankruptcy judges to rewrite mortgages, thereby reducing the principal, which, theoretically, would allow homeowners to afford their house payments after bankruptcy. Many of us thought the issue was dead, but it looks to be regaining strength, according to a Wall Street Journal story.From the Journal:Mortgage lenders also are modifying tens of thousands of loans without government help. But often this hasn’t solved the problem. A report last week by the Office of the Comptroller of the Currency and the Office of Thrift Supervision found that nearly 37% of mortgages modified in the first quarter of 2008 were 60 days or more delinquent after six months.”It is absolutely clear that voluntary modification is just not working,” says Rep. Brad Miller, a North Carolina Democrat. “Every plan that Congress has passed, we do it and nothing happens.”Mr. Miller intends to introduce a mortgage bankruptcy-reform bill Monday, the first day of the new session. Illinois Democrat Richard Durbin plans to introduce a similar bill in the Senate.Lenders warn that mortgage cram-downs will lead to higher interest rates and down payments, as banks seek to mitigate future losses from judicially imposed write-downs. They also are concerned that the reform measure would add to the losses they have already sustained from the housing crisis.As I said earlier, I argued both sides of the issue during the exam. Here, however, I am not constrained. My position is this: I am against judicially-sanctioned cram downs. I’d rather let the free-market work itself out. No one is guaranteed equity in their home. Boo-fricken-hoo if people are currently under water on their homes. In due time, I imagine that they’ll get back to even (and then some).As I argued on my exam, by allowing cram downs you are essentially giving these homeowners a windfall when/if the value of their homes return to pre-cram-down levels. I understand that one in six homeowners are currently underwater. But five out of six homeowners are not. Sad as it is, life isn’t fair. I’d rather allow the free market to work itself out. If lenders want to modify loans that result in write downs, so be it. But I’d like to keep it out of the hands of judges.You can read the rest of the story here (link).Related Articles:Citigroup, Senators in Talks to Let Judges Modify Mortgages
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