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Financial Services Industry Wastes No Time Fighting Cramdown

This should come as no surprise: Even the mere mention of the possibility of bringing back cramdown legislation prompted the Mortgage Bankers Association to spring into action. Here’s the group’s rapid response to comments this week from several powerful Democrats, who who threatened to renew efforts to allow bankruptcy judges to change, or cramdown, mortgage loans to more affordable terms if servicers don’t do more loan modifications:

In response to discussion today in the House Financial Services Committee raising the possibility that a regulatory reform bill could include provisions allowing bankruptcy judges to modify mortgages on primary residences, MBA Chairman David Kittle issued the following statement.

“Allowing judges to retroactively modify borrowers’ mortgage balances will destabilize a mortgage market that desperately needs stability right now.

“Treasury officials today reported that the Obama administration’s Home Affordable Modification Program – HAMP – is on target to reach its stated goal of 500,000 trial loan modifications by November 1. We ought to let that program, still in its early stages, continue to take hold, rather than rushing to try to pass a measure that will do more harm than good.

“We hope that proponents of cram down will recognize the successes that the industry is making through HAMP and other means to help keep borrowers in their homes. Loan modifications cannot happen overnight. But as today’s report from Treasury shows, servicers are making significant progress.”

Calling the progress on loan modifications “significant” is stretching it, since only about 12 percent of eligible borrowers have signed up for trial loan workouts under the $75 billion Making Home Affordable plan. It shows how far apart the two sides are on this issue – and gives a glimpse of the tough fight ahead for any kind of financial regulatory reform.

Matthew Padilla at Mortgage Insider offers a possible solution:

A simple compromise is to allow cramdowns but pass a bill that says they will only apply to loans made starting in 2010. That will give the industry some months to adjust.

Cramdowns could be one key factor in avoiding another housing bubble and financial meltdown.

But not if the Mortgage Bankers Association and all the other powerful financial groups that continue to oppose cramdown get their way, once again.

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