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Treasury Says Cramdown Is Still Off the Table, Even Though Loan Modifications Aren’t Working

As Mike pointed out today, the slow pace of loan modification progress has prompted some lawmakers to once again call for mortgage cramdown legislation that would allow bankruptcy judges to modify loans and keep borrowers in their homes.

But the Obama administration is signaling clearly that while it may be open to some new tactics, cramdown is not one of them.

Assistant Treasury Secretary Michael Barr told reporters on Wednesday that “Bankruptcy reform is an additional tool, but it’s not the focus of our efforts to keep people in their homes,” The Wall Street Journal reported. In plain English, that basically means the administration isn’t going to support any renewed efforts to get a cramdown bill passed.

And Barr’s comments came after Treasury released a report noting that only 12 percent of eligible borrowers have started trial loan modifications under the $75 billion mortgage foreclosure prevention plan.

Supporters of cramdown say it’s necessary as a backstop to force servicers to try harder to complete loan modifications. Incentive payments to servicers for reworking loans are the carrot, and cramdown is supposed to be the stick. The administration in not only dropping the stick, but it’s increasing the carrot part of the plan. Treasury also plans this month to announce it will offer additional financial incentives to servicers to complete short sales, in which a homeowner as a last resort sells his property for less than is owed on the mortgage, and the bank accepts the discount, American Banker reported.

Under the Treasury proposal, servicers will get a $1,000 “success fee” for each short sale they are able to compete, according to American Banker.

The problem with short sales is that they have been notoriously difficult to complete, with complaints growing that banks are deliberately dragging their feet on them. Also, as Mortgage Insider blogger Matthew Padilla explains, a homeowner’s credit still can get stung by a short sale. But Treasury probably is pushing the idea because its loan modification plan clearly isn’t reaching enough troubled homeowners, Padilla said.

All this points to a simpler, quicker, and more effective solution — cramdown. But the administration clearly isn’t willing to go there. Until then, maybe some homeowners will benefit from a short sale. Maybe some more will get their loan modifications. But no doubt many will simply go on to lose their homes — something that might have been prevented by a bankruptcy judge. The administration has the power to push Congress toward cramdown, but has chosen not to. And that’s something to keep in mind each time Treasury or the White House talks about how much the government wants to help homeowners in trouble.

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