Are You Ready For a “Cram-Down?”

Something has to be done to help home owners who have that lethal combination of being delinquent on their mortgage and upside down on the value of their home…and if something is done quickly the powers in Washington are offering their own solution…cram-downs!

A Deutsche Bank report this week estimates that 26% of U.S. homeowners with mortgages are underwater (owe more than their homes are worth) and predicts that plummeting house prices will push the figure to 48% by 2011.

House Financial Services Committee chairman Barney Frank (D-Mass.) has already warned that if more loans aren’t worked out, he’ll renew the push to allow bankruptcy judges to order reductions in mortgage amounts. Slicing a chunk of principal off mortgages would be one way to make homes “right-side up.”

This “right-side up strategy is also know as a “cram-down.”

The causes of this phenomenon are not news to many of us who have studied Los Angeles, Ca homes for sale.

Falling home prices quickly brought values below mortgage amounts, especially for homes purchased in recent years with little money down.

Los Angeles home loans beginning in 2003 enjoyed three years of home price appreciation before prices began to fall, cushioning the impact. A loan made in September 2006 in Los Angeles has experienced nothing but depreciation.

Because Southern California home prices began falling earlier than those in other parts of the country, Deutsche Bank thinks we may be closer to the bottom for Los Angeles home mortgages and their values.

Los Angeles doesn’t make the list of the 33 regions predicted to have the worst negative equity in 2010…we’ll have to wait and hope this turns out to be correct.

Lawmakers are likely to push for more initiatives to head off the 48% national negative equity level Deutsche Bank says is coming.

Under current United States law, bankruptcy courts are not allowed to perform cram downs (i.e., reduce the principal amount or change the interest rate or other terms) on mortgages of bankruptcy filers’ primary residences.

As a potential solution to the sub-prime mortgage crisis, legislators and consumer advocates have advanced a proposal to allow cram downs on these loans, and legislation to that effect was introduced for potential inclusion in the Emergency Economic Stabilization Act of 2008.

The latest round of economic stimulus currently being crafted by Senate Democrats is likely to include controversial legislation allowing so-called “cram-downs” of mortgage debt in bankruptcy, according to reports.

The financial industry strongly voiced opposition to such a measure, claiming that it would create additional uncertainty as to the value of mortgage loans (and by extension, the collateralized debt obligations into which they are bundled).

While the provision ultimately was not included in the bill passed into law, the concept still has advocates and new legislation allowing for first-mortgage cram downs may appear in the future.

The real question that needs to be discussed is not whether “cram-downs” will help those homeowners upside down on their current equity position and fighting to keep their.

For someone in this position a “cram-down” is the ideal solution…but will this plan stabilize housing long term?

It would seem unlikely.

Put yourself in the position of a lender after “cram- down” legislation has been put into effect.

The loan you write today could be arbitrarily reduced in principal, due to some extenuating circumstance by the borrower that cannot be seen at the time of the initial application.

The borrower suddenly finds himself in a new set of circumstances that are causing him to get behind in payments.

Regardless of how valid their claim may or may not be…they go before a bankruptcy judge who decides to reduce your loan by 20% in order to give this troubled home owner a decent chance at not losing his property…great for the home owner…not so great for the lender.

What will lenders do to combat “cram-down” legislation should it ever go in to effect?

Most likely, reduce the amount of loans they write by becoming even more conservative in their underwriting in attempt to avoid a “cram-down” borrower in the future.

The fewer loans available to consumers will only translate into a longer recovery for and the economy in general… and to a point that nobody can predict when it may turn around.

Clearly, “cram-downs” are not the answer to long-term stability for the housing market…or the economy!

The best solution for all concerned is to work with those borrowers who are qualified by reducing their payments to a level that is acceptable and will give them a chance to save their property.

This way, a lender will not take a substantial hit to his principal investment…the original loan amount…but rather to his short term profit…the interest on the loan. In this scenario everyone benefits.

“Cram-downs” (the name alone tell you it can’t be good) allow certain politician to grand stand and placate consumers in the short term.

Instead of a “cram-down” we need a “stand-down” for long term stability… which will can only take place when lenders can lend to qualified borrowers without fear of having their loans altered at the whims of others.

“Stand-down” today…so we can eliminate the “cram-down” tomorrow.

Albert Arouh
Purchase Mortgage Specialist
City 1st Mortgage Bank
albert@losangeleshomeloanpro.com

Los Angeles Home Buyers Report
http://www.losangeleshomeloanpro.com

The Los Angeles Home Buyers Report
“Cram It Barney!”
Insiders Report For 8-8-2009: