The Cram Down. When the Bankruptcy Code was re-written in 1978, it gave extraordinary powers to the court to modify or change the rights of creditors, especially in Chapter 13 cases. If, for example, the person filing the Chapter 13 owed more on a car than what it was worth, the court could reduce the balance of the loan to the value of the car. This became known as a cram down--the balance of the secured loan was crammed down to the value of the security. While the most important use of the cram down was typically done on loans secured by vehicles, it could be applied to virtually any secured loan, such as financed furniture, boats, recreation vehicles, etc. Although the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 limited the court's ability to cram down the balance on loans to purchase vehicles, it was still available for loans secured by other kinds of property. [11 USC § 1325(a)(5)(B)(ii) is the code section that creates the cram down.]
Mortgages were different. Lenders that financed home purchases were not subject to the cram down. A Chapter 13 plan could stop a foreclosure and catch up an arrearage in the mortgage payments, but it could not do anything to the balance of the loan, the interest rate, or the monthly payments. [See 11 USC § 1322(b)(2).]
Efforts to change the treatment of mortgages. In January, 2009, Senator Richard Durbin [D-Ill] and Representative Brad Miller [D-N.C.], introduced the legislation allowing judges to reduce mortgage debt. The same kind of legislation was introduced in 2007 and 2008, but it got nowhere because of very strong lenders' lobby and Bush administration opposition.
Big change by a big lender. In a remarkable change in position, Citigroup, one of the nation's largest mortgage lenders, sent letters to congressional leaders announcing its support of mortgage cram down legislation. Other lenders seem to have been left in stunned silence by the announcement. It is conceivable that the payment of $45 billion in Federal rescue funds to Citigroup in the fall of 2008 might have something to do with that lender's change of heart.
Big administration change. When President-elect Obama was in the Senate, he co-sponsored Durbin’s previous mortgage cram down bill. During his presidential campaign he said that he would try to pass the legislation upon taking office.
Some details about the bill. The proposed legislation would allow a bankruptcy to lower the interest rate, reduce the principal amount, and shorten the mortgage length. Homeowners would have to certify that they tried to renegotiate loan outside of the bankruptcy. The legislation would apply to all home loans written before the enactment of the legislation.
This page was last revised: 02/18/09