Citi agrees to do cram downs

After meetings with lawmakers, Citigroup has agreed to back legislation that would allow bankruptcy judges to alter the amount due on mortgage principal, so called cram downs.

As it stands today, all other debtors including corporations have the cram down option available in bankruptcy court.  However, changes to bankruptcy law have eliminated this option for mortgages, creating an impasse as house prices have dropped.

This is how Reuters describes the Citi agreement:

Financial giant Citigroup Inc has agreed to support a controversial rewrite of U.S. bankruptcy law aimed at helping troubled mortgage borrowers, three Democratic senators said on Thursday.

Senators Richard Durbin of Illinois, Charles Schumer of New York and Christopher Dodd of Connecticut said the legal reform would help “millions of families save their homes.”

Citigroup has agreed to support, under certain conditions, a rewrite of bankruptcy law. Under the change, known as “cramdown,” bankruptcy courts could alter the terms of mortgages, subject to certain conditions, the senators said.

Citigroup had no immediate comment.

Only mortgages entered into prior to the date of enactment of the bill would be eligible for the treatment, they said.

Homeowners would have to certify that they have tried to contact their lender before filing for bankruptcy, they said.

Only major violations of the “Truth in Lending Act” would invalidate creditor claims on bankruptcy, they said.

I am all in favour of cram downs. They represent an effective and speedy way to move house prices down to a stable equilibrium level. And I would much rather recapitalize a bank doing cram downs, to the degree cram downs cause distress in the financial sector, than just handing free money to the financial services sector.

Tanta of Calculated Risk was also in favour of cram downs and indicated so in several posts there. CR recently mentioned the issue and has several links to her posts in their recent post. See the link below for links to her insightful commentary.

Sources Citi backs mortgage bankruptcy reform: Senators – Reuters House Considers Cram Downs – Calculated Risk

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Originally published at Credit Writedowns and reproduced here with the author’s permission.