A Plea - Don't Allow Mortgage Cramdown

One of the proposals before Congress is to allow Bankruptcy Court judges to "cram down" first mortgages on residential real estate. Some believe this is good for the nation, others do not.

Today's Wall Street Journal features an op-ed by Todd J. Zywicki, "Don't Let Judges Tear Up Mortgage Contracts." Allowing a cram down "would be a profound mistake," he writes.

• Mortgage modification provides a windfall for some homeowners but "the ripple effects could further roil America's consumer credit markets."
• "In the first place, mortgage costs will rise."
• "Allowing mortgage modification in bankruptcy also could unleash a torrent of bankruptcies." "A surge in new bankruptcy filings, brought about by a judge's power to modify mortgages, could destabilize the market for all other types of consumer credit."

"There are other problems. A bankruptcy judge's power to reset interest rates and strip down principal to the value of the property sets up a dynamic that will fail to help many needy homeowners, and also reward bankruptcy abuse.

"Consider that the pending legislation requires the judge to set the interest rate at the prime rate plus "a reasonable premium for risk." Question: What is a reasonable risk premium for an already risky sub-prime borrower who has filed for bankruptcy and is getting the equivalent of a new loan with nothing down?"

We would have to agree that Mr. Zywicki's thoughts make sense. Are we willing to throw more homeowners into bankruptcy in order to test the waters of a mortgage cram down?

Read the full article here.

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