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FBR: Cramdown Bill Could Cause Surge in BK Filings

Cramdown legislation pending in Congress could cause a "substantial" surge in bankruptcy filings by consumers, including mortgagors who are currently paying their loans, according to a new report by Friedman Billings Ramsey (FBR).

FBR notes that banks, thrifts and other large holders of second liens "would most likely be wiped out by a bankruptcy judge in the modification process."

Banks with large HELOC portfolios that might be hurt include Bank of America, Citigroup and U.S. Bancorp, among others, FBR predicts.

The Mortgage Bankers Association is lobbying to have cramdowns limited to subprime loans originated during the peak of the housing boom and that cramdown relief should be temporary. The House Judiciary Committee is expected to vote on cramdown legislation on Tuesday afternoon.

According to a report in ASR sister publication American Banker, concessions have been made to the mortgage industry that might soften the blow of cramdowns, including a provision that would allow lenders to share in the appreciation of a home's value with borrowers who discharge mortgage debt in a bankruptcy.

Legislators are including language in the bill that would exempt Federal Housing Administration and Department of Veterans Affairs guaranteed loans from being crammed down.

The MBA is adamant that a sunset date be attached to any cramdown authority.

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