While remaining steadfast in their opposition to "cramdowns," the Mortgage Bankers Association (MBA) acknowledges that supporters are gaining momentum and the trade group has outlined parameters it would like to see included in legislation that would allow bankruptcy judges to reduce the secured portion of a mortgage loan.
In a conference call with reporters, MBA representatives said a bill that allows bankruptcy judges to alter the contractual terms of a mortgage should limit the discretion judges have to reduce principal, lower rates or extend terms on a mortgage.
MBA chairman David Kittle said that if Congress does go this route, cramdowns should only be allowed after a "waterfall" of other loss mitigation options have been exhausted, including repayment plans, loan modifications, an extension of terms and principal deferral. He also proposed that cramdowns be limited to subprime loans originated during the peak of the housing boom and that cramdown relief should be temporary.
"We need to set a permanent sunset date after which judges will no longer have this extraordinary power to alter the terms of a mortgage," Kittle said, noting that two thirds of bankruptcy repayment plans fail, in which case the borrower typically loses their home to foreclosure anyway.
Steve O'Connor, MBA's senior vice president of government affairs, acknowledged that "clearly there is political momentum" favoring supporters of cramdown relief. "We recognize the realities of the landscape. And if in fact cramdowns are implemented, we think there should be some constraints to limit damage to the marketplace."