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All Carrot, No Stick

April 29, 2009 - by Donny Shaw

It’s looking increasingly likely that cramdown, a provision giving judges the power to reduce mortgage principals and interest rates for homeowners in bankruptcy, will be removed from the the housing bill (H.R. 1106) this week by the Senate.

Of the two avenues for reworking troubled mortgages in President Obama’s housing plan, cramdown is the one that would not give more taxpayer money to banks. It would be free of cost to taxpayers while the other avenue, incentive payments for voluntarily lowering interest rates, is estimated to cost $75 billion. Furthermore, cramdown is the “stick” in the plan. It would put pressure on the banks to actually do something with troubled mortgages. Without cramdown, there is no incentive for a bank to lower an interest rate if they determine that it would cost them more than the $4,000 government bonus they would get for doing so.

So far, all the foreclosure prevention plans that rely on voluntary participation from the banks have failed. If cramdown is removed from the current bill, we will be left with another voluntary plan plus some cash bonuses for banks. Homeowners who owe much more than the current value of their house will still not be helped.

From the New York Times, here’s an estimate of what removing cramdown might do to the overall foreclosure plan:

The Moody’s analysis estimates that up to two million mortgages will be voluntarily modified under the Obama plan and that up to 1.25 million will be modified in bankruptcy court.

If [cramdown does] not pass, Moody’s says its estimate of the number of modifications would drop by more than half, with 475,000 fewer voluntary modifications and zero court-approved modifications.

UPDATE: The Senate debate, which is happening now, is actually on S. 896, which is the Senate’s version of H.R. 1106, but without cramdown. Cramdown will be submitted as an amendment by Sen. Durbin (D-IL) and is expected to fail. No other cramdown-related amendments will be in order for consideration.

UPDATE 2: The amendment failed, 45-51, with 11 Democrats voting against. Roll call details soon. View the full roll call details here.

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