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Lenders Testify Against Cramdowns

MBA chairman testimony before Senate committee

November 19, 2008

By MortgageDaily.com staff

Mortgage bankers reiterated their opposition to cramdowns in testimony before Congress. They warned that allowing bankruptcy judges to modify mortgages could lead to tighter standards, higher interest rates and lower loan-to-values -- even on government programs.

The testimony was given today by David G. Kittle before the Senate Committee on the Judiciary, according to a transcript of his prepared statement. Kittle is Chairman of the Mortgage Bankers Association.

The committee's hearing was entitled, Helping Families Save Their Homes: The Role of Bankruptcy Law.

Firmly entrenched congressional Democrats are proposing that bankruptcy judges be allowed to modify mortgages on owner-occupied properties.

But Kittle explained that bankruptcy is bad for borrowers because of damage to their credit histories. He also noted that two-thirds of bankrupt borrowers are unable to meet their repayment plans.

He said cramdown legislation would lead to tighter underwriting standards, increased interest rates and lower LTVs. It could also lead to the re-emergence of redlining.

"Cramdown legislation would add new risks to the calculation lenders make in setting prices," Kittle stated. "For the first time, lenders will have to pay more attention to markets with the most volatility and those with higher risks -- such as rural areas, inner cities and new subdivisions -- where history shows the greatest fluctuation of home values."

Kittle also warned that cramdown laws would only add more instability to the already fragile markets. Even FHA-insured and VA-guaranteed loans would become more difficult to obtain because of lender concerns that FHA insurance would not cover the loss from a principal reduction.

"In effect, Congress would end the only meaningful lending option currently available to most low-income borrowers -- almost overnight," he added.

The executive noted that while loans against vacation homes can already be modified by a bankruptcy judge, borrowers on vacation homes pay higher rates and fees, make bigger downpayments and are forced to pay off the entire modified amount within three to five years.

In September, when lawmakers were considering whether to include a cramdown provision in the Treasury's proposed rescue package, MBA issued a letter to members of the House and Senate successfully pleading to keep cramdown provisions out of the bill.

In October 2007, Kittle told the House Judiciary Committee's Subcommittee on Commercial and Administrative Law that cramdowns could increase rates on mortgage by as much as 2 percent.

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