It Looks Like Mortgage Cramdowns Are Coming

Does it strike anyone else as somewhat strange that so much time and effort was put into getting Citi to be the lead dog on the cave in to bankruptcy mortgage cramdowns.

I know that it’s not unusual for this sort of legislation to get hammered out in the backrooms of Congress. No problem with that from these quarters, it’s just the way business gets done in Washington. But usually it is a negotiation between the functionaries and the lobbyists, not one publicly carried out with just a single participant¬†of an industry. So, the question arises as to why it was handled in this manner.

I suppose that Citi was chosen to be the first to bow simply because it’s the biggest ward of the state. Frankly, I can’t imagine that there was a lot of blow-back from them on this issue. It appears as if a couple a fig leaf or two was tossed their way to create the appearance of negotiation but the whole charade is a bit hard to swallow.

But forget that and look for a second at the details. Two things strike me:

  1. Why are existing mortgages the only loans that will be eligible? If this is good policy then it shouldn’t have limitations. Is it therefore something else? Is there a fear that there could indeed be negative ramifications if it were to become established procedure? In fact, is this just a way to kick the can over to the courts and thus relieve Congress of the onus of passing some sort of costly mortgage relief plan?
  2. The legislation is supposed to allow for invalidation of creditor claims due to Truth in Lending violations of a major nature. Given the propensity of Congress to draft lose legislation, a close eye will have to be kept on this one. Done too broadly and with discretion ceded to the courts you could see a lot more forgiveness than modification.

Tempting as it is, I won’t get up on my soapbox about this subject. If you want to see prior thoughts just put cramdown into the search box and you’ll find the previous posts. Most of the blogs I read seem to have come to the conclusion this is a good thing. I’ll hang out with the minority and predict it’s going to be a disaster.

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