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Bankruptcy Cramdown Is Back

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Despite the fact that the press representative in Senator Dick Durbin's (D-IL) office tells me "negotiations are still underway," several outlets are reporting that the Senate version of the so-called bankruptcy "cramdown" bill is imminent. The house passed legislation in March allowing bankruptcy judges to modify home loans, with a couple of caveats, the main one being that the borrower had to have exhausted all possibilities for modification with his/her lender.

Now we've already discussed ad nauseam the main argument against the idea, which is that it would throw into question the value of all mortgages, and therefore raise the cost of a mortgage for everyone else. So far only Citigroup has said it would support such a bill, but supposedly the other big guys, like JPMorgan Chaseand Wells Fargoare heavy in the negotiations. The lobby against is strong, and banks, while down, are certainly not out in the beltway bargaining game.

Spring Real Estate Guide 2009 | A CNBC Special Report
Spring Real Estate Guide 2009 | A CNBC Special Report

What's important to recognize now, though, is that we're coming at this idea a bit differently than we have in past go-rounds (Dems tried to get it passed last summer, but no go).

The administration's Making Homes Affordable program is well underway, with banks supposedly doing their all to modify home loans by reducing monthly payments under a certain formula. Let me emphasize that the program is barely a month old, so it may not be fair to judge it on its merits just yet. But here's what I'm hearing:

Banks/servicers are overwhelmed, borrowers are getting the serious run around, investors are mounting new offensives over who will take the losses on these modified loans, and many borrowers who are getting through to the right lines are being turned down. If judges are allowed to modify loans, then investors would likely take all the losses because they'd have no legal recourse against servicers for breaking any contracts. Servicers would be following judicial orders.

The big concern on Wall Street is that the bankruptcy cramdown will keep investors out of the mortgage backed securities game, but frankly, the only ones out there buying loans are Fannie,Freddieand Ginnie,which when you put them all together are you and me.

Ironic, isn't it.

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