Proposed cram down legislation: What does this mean for the mortgage industry

May 2008
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Proposed cram down legislation: What does this mean for the mortgage industry: PwC

At a glance

As of the publishing date of this Point of View document, legislation to allow for mortgage cram downs in Chapter 13 proceedings has been excluded from the new stimulus bill. Despite its exclusion, the bankruptcy bill has legislative support and is likely to be attached to upcoming "must pass" legislation. The Mortgage Bankers Association acknowledges increased likelihood of its passage and is now lobbying to affect the bill’s scope and specificity.

New legislation in the US Senate (S. 61) and the House of Representatives (H.R 200) proposes to allow bankruptcy judges, as part of Chapter 13 bankruptcy proceedings, to "cram down" mortgage balances with creditors (reduce the secured mortgage debt on primary residences to the fair market value of the property) thereby reducing consumer obligations. As part of this legislation, mortgage holder rights could also be modified to:
  • Prohibit/delay interest rate adjustments
  • Extend repayment terms
  • Modify interest calculations to a fixed annual percentage
As of the publishing date of this Point of View document, legislation to allow for mortgage cram downs in Chapter 13 proceedings has been excluded from the new stimulus bill. Despite its exclusion, the bankruptcy bill has legislative support and is likely to be attached to upcoming "must pass" legislation. The Mortgage Bankers Association acknowledges increased likelihood of its passage and is now lobbying to affect the bill’s scope and specificity.

The cram down of residential mortgage loans represents a complex topic for mortgage companies. We recommend that companies take a holistic approach in putting a well thought out response in place to manage the changes associated with this new legislation.