Thursday, February 26, 2009

Mortgage Cramdown Legislation

Congress is currently considering legislation ( HR 1106) that would allow bankruptcy judges to lower the principal balance owed on a mortgage loan, a practice referred to as a "cramdown". Judges would also be able to reduce mortgage interest rates or lengthen the term of the original mortgage. The idea behind this cramdown legislation is to help consumers whose home value has dropped below the balance owed on the mortgage. Keep in mind that the financial institution would not have been responsible for the decline in home value. Does this seem fair? Who would pay for the balance amount that was written off in the "cramdown"? Initially the financial institution would charge off or expense the balance. To cover the risk and cost of this type of potential event, financial institutions will raise mortgage rates and also increase the required down payment amount on new mortgages. The true cost of the mortgage cramdown would be passed along to those who pay their mortgages. This would tighten up a mortgage loan market that is already hurting for available lenders. The cramdown legislation also makes no provision for the fact that a property can APPRECIATE in value in the future.

The original mortgage contract should be honored. The credit union stands ready to assist members with loan modifications in cases of job losses, excessive medical expenses, divorce situations, and other reasonable events that affect a person's ability to repay. In all cases though, the principal balance would need to be paid as part of the plan.

The mortgage cramdown legislation is bad for the majority of consumers who pay their debts. North Alabama Educators Credit Union has never engaged in sub-prime mortgage loans or any other predatory type of loan. We have not had a single foreclosure since this "mortgage crisis" has begun. If we did have a mortgage bankruptcy in the future though , the other members of the credit union should not be responsible for paying the "cramdown" balance of one member.

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