Cram Downs

Bank of America Now Supports Cramdown, Giving Judges Authority To Modify Home Mortgages (VIDEO)

Bank of America, the nation’s largest lender and its biggest bank by assets, now supports changing the law to give federal judges the power to modify mortgages in bankruptcy.

The bank joins Citigroup, the nation’s third-largest bank by assets, in supporting a change to existing law to give homeowners more leverage. Unlike other forms of debt, bankruptcy judges presently lack the power to change mortgage terms. The banking and home mortgage industry want to keep it that way — by not allowing judges the authority to change the terms, troubled homeowners are at the mercy of their lenders. They take what they get.

As a candidate Barak Obama favored giving bankruptcy courts the power to cram down residential mortgages. However, as president he has backed away from this idea.

Cramming down a second mortgage that is not underwater is allowed on investment properties in Chapter 13. For example, if there is $300k owing on the first mortagage and $150k owing on the second mortgage and the property is worth $320,000. The second mortgage can be stripped down to $20,000 – provided that the debtor pays the $20,000 in equity during the course of the Chapter 13 plan. See 11 USC 1322(b)(2). This is feasible if the equity is small, but obviously it gets more difficult if the remaining equity securing the second mortgage is large.

However, cramming down a second mortgage on a residence is not allowed.

For personal residences there is an alternative: If a second mortgage is completely underwater, for example, if the property is worth less than what is owing on the first mortgage, then the second mortgage can be stripped off in Chapter 13 bankruptcy.

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