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Mortgage Bankers Warn of Cramdown Consequences

MBA sends letter to Congress

September 24, 2008

By MortgageDaily.com staff


Mortgage bankers have sent a letter to Congress warning that a proposal to allow bankruptcy judges the ability to modify mortgages could raise the cost of mortgages and stifle the recovery effort.

In response to Treasury Secretary Henry M. Paulson Jr.'s proposal for the U.S. government to purchase up to $700 billion in troubled mortgage-related assets, members of Congress have drafted legislation that would tack on a provision for mortgage cram downs. Such a provision could give bankruptcy judges the authority to modify a mortgage -- including a reduction in the principal balance.

But mortgage bankers warn that such a move will raise the cost of credit and cause further instability for the mortgage markets.

In a letter to members of the House and Senate, John A. Courson, chief operating officer of the Mortgage Bankers Association, said the trade group opposes efforts to allow judges to alter residential mortgages in bankruptcy.

He noted that the proposal is not a mortgage or a housing bill and is not designed to address the problems in the primary mortgage market. Instead, it is an effort to resolve the ongoing financial crisis.

"MBA supports the effort to pass this legislation quickly, but opposes adding unrelated proposals to this bill -- primarily efforts to allow judges to alter residential mortgages in bankruptcy," Courson stated in the letter. "While we will continue to oppose efforts to give judges the authority to cram down legitimate mortgage debt, there are many other proposals that could help ensure the future health of our mortgage origination, servicing and investment systems."

He went on to explain that current bankruptcy law exempts primary residence mortgage debt from the bankruptcy process. This exemption has helped keep the cost of home financing lower than other forms of lending.

But tampering with the exemption will force lenders to further mark down the value of their mortgage portfolios. Such action would lead to increased credit costs and further destabilization of the market.

On Monday, Courson issued a statement indicating the trade group's disappointment over legislators who have used this is an opportunity to tack on their favorite pet items.

"Resurrecting bankruptcy cram down during this current crisis would be wholly unproductive and, in fact, runs counter to the bi-partisan efforts to restore liquidity to the global capital markets. In fact, it is really irrelevant to the current discussion.," he said. "Once the fund purchases the distressed mortgages, it doesn't need a bankruptcy judge to rewrite the loan balance. It can write down the loan balance itself, without Congress giving bankruptcy judges that authority."


Related:

More Details Emerge on Mortgage Bailout
More details have emerged on the Bush administration's legislative proposal to acquire mortgage assets and prevent a full-scale collapse of the U.S. financial system. The latest move is the biggest yet among a host of historical actions by the government this year.

Plan calls for U.S. purchase of up to $700 billion in mortgage assets

Paulson Announces Major Steps to Restore Mortgage Liquidity
The Bush administration announced major steps in unclogging mortgage securities in the U.S. financial system and said legislation may be passed as early as next week to relieve financial institutions of illiquid mortgage assets.

Paulson says GSEs, Treasury to step up MBS purchases

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