Mortgage cramdowns have been in the news recently because the Senate's bankruptcy bill -- which would have allowed bankruptcy judges to modify some mortgages -- went down in flames on Thursday. And Jack Kemp has been in the news because he died on Saturday. So I thought I would put the two together and note that one issue on which Kemp bucked the Republican Party consensus was mortgage cramdowns. In fact, he recently penned a Los Angeles Times op-ed backing some form of the cramdown.
I applaud the White House efforts to encourage mortgage servicers to modify existing adjustable-rate loans for a limited number of borrowers who cannot afford interest rate resets. However, depending solely on the goodwill of an industry that bears no small measure of responsibility in this crisis is unlikely to be the full answer.
[...] Bankruptcy law is wildly off-kilter in how it treats homeownership. Under current law, courts can lower unreasonably high interest rates on secured loans, reschedule secured loan payments to make them more affordable and adjust the secured portion of loans down to the fair market value of the underlying property -- all secured loans, that is, except those secured by the debtor's home. This gaping loophole threatens the most vulnerable with the loss of their most valuable assets -- their homes -- and leaves untouched their largest liabilities -- their mortgages.
Whole thing is here. I think homeownership is overrated, and I take seriously the concerns that cramdowns might have the unintended consequence of raising mortgage rates and further confusing the price of the related derivatives. But I wonder why supporters of the recent cramdown proposal don't start bringing up Kemp.
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