As loyal readers know, I’ve been opposed to mortgage cramdowns from the get-go.
In essence, cramdowns reduce the principal owed on a mortgage based on a borrower’s ability to pay. That is, if a guy took on a mortgage that he couldn’t afford and stops paying, then the lender would have to reduce the amount owed to fit the deadbeat’s budget. A fundamentally wacky idea for lots or reasons. Most notably, if lenders had to absorb principal risk on all mortgages, they would naturally just up the interest rates on all mortgages in order to cover the added risk. In other words, good borrowers would end up subsidizing the deadbeats.
Team Obama was pushing aggressively for cramdowns — to slow foreclosures and spread the wealth (by having good borrowers subsidize bad borrowers).
According to the WSJ:
“Senate Republicans defeated the budget bankruptcy “cramdown” bill …that had easily passed the House and was one of President Obama’s housing priorities.
The cramdown would have allowed bankruptcy judges to rewrite contracts to reduce the amount that people owe on their mortgages. But a bipartisan majority understood that relief for today’s troubled borrowers would be paid with higher rates on the next generation of homeowners, as lenders priced the added risk into mortgage contracts.
Speaking for millions of renters and nondelinquent borrowers, Mr. McConnell said that the vote “ensures that homeowners who pay their bills and follow the rules won’t see an interest-rate hike at the whim of a bankruptcy judge.”
Full article:
http://online.wsj.com/article/SB124113493922575179.html
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