Cramdown Legislation & Blue Dogs

The House Financial Services committee meets. ...
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Language is a beautiful thing. It provides us with the ability to label everything. The label can be clear, concise and to the point or it can be clear as mud.

Take the title of this post. The words seem to be clear, concise and to the point but in actuality they are clear as mud. For starters, we need to understand they are political terms with a huge impact on real estate. When politics interacts with real estate, clear, concise and to the point is almost always clear as mud. That’s important for this particular audience.

Cramdown legislation refers to the ongoing battle in Congress to allow bankruptcy judges, in general terms, the ability to change a bankrupt’s original mortgage contract. It also has the implication of allowing loan servicers the ability to pursue principal reductions. For now that is all we need to know about the animal called cramdown legislation.

Blue Dogs is a term applied to 51 Congressional Conservative Democrats. Yes, I know, saying Conservative and Democrat in the same sentence sounds like an oxymoron but it is a real term being used and applied to real people as you read this. This group of moderates/conservatives seem to have some power because they have already won a commitment from Obama to endorse enactment of rules requiring that new government programs be paid for with spending cuts or tax increases rather than financed by new borrowing.

This group of moderates/conservatives has advanced the proposition that greater efforts are needed to ensure that homeowners make good-faith attempts to work with their lenders, before going into bankruptcy. Remember it is the bankruptcy judges who will be given new and broad powers unbeknownst in this republic prior to cramdown legislation.

Loan Modification

Loan modification is another label and very germane to this topic. This one, thank goodness, is clear, concise and to the point. A loan modification simply means the lender has agreed to modify the terms of the loan. Well, that would be simple if there wasn’t an after reaction.

It is that after reaction that ties in cramdown legislation with the Blue Dogs. But first, a word or two about loan modification. The relevant after reaction to the scenario called loan modification is that “half of all borrowers who receive loan modifications end up defaulting again, leading to more foreclosed properties” according to an article in the April 2009 Collections & Credit Risk edition.

To confuse the issue, in the same C&CR edition a mortgage analyst says “modifications that result in lower payments tended to re-default at half the rate as plans under which payments were higher or remained about the same.” Please note what seems like opposite sounding statements is really saying about the same thing.

The research shows a goodly number – from what I gather, nobody knows for sure how many re-default – will re-default whether they receive lower payments or their payments are kept the same but the loan term is modified. In other words, loan modification is a beautiful thing but not in every case.

Back To Blue Dogs

The cramdown legislation hasn’t passed in its final form as of this writing. The Blue Dogs are the reason. As I stated above, they are the ones holding up the legislative progress until the provision of making the homeowner pursue stricter good faith efforts to work with their lenders prior to bankruptcy is included in the bill.

According to me, this requirement should be quite a herculean effort for the homeowner given the lender/servicer is under no obligation to make any reciprocal good faith effort to/for/toward the homeowner. Hopefully the Blue Dogs will loosen their thought theology towards the homeowner and redirect it toward the lenders. Hopefully they will require the lender to document the communication they have with their borrowers.

To me, this will ease the modification process for both parties. It will also show the BK judge the extent of the homeowner’s good faith effort.

I’m not pretending to have a solution. I’m only writing about a real problem that needs a real solution. It appears the Blue Dogs may be holding a real time solution in one or both hands.

Let’s hope so.

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  1. Joe,

    A lot of people are asking the same question and saying the same things you just said. I guess the politicians truly don’t listen to either the rule of very well established law or the people. I hope you didn’t vote for an incumbent…

  2. Modifying your loan (changing terms to better suit your needs) is becoming increasing popular as lenders realize the true costs of foreclosing and settlements are reached with large lenders to force modification.

    If you have had a recent financial hardship, job loss or change, divorce, illness, or family problems, you may be able to qualify for one of these programs. In addition, your loan docs may have been drawn incorrectly causing a “truth in lending” or other such violation that makes lenders eager to correct when faced with legal pressure.

    There are several possible outcomes though.

  3. Suzette,

    You are absolutely correct. However, the other side of the coin is in the legislation being proposed. It changes the contract which, in effect, will re-write centuries of established contract law.

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