What is a cram down in bankruptcy?

Posted on By Ricky at 26 January, 2009, 10:00 pm

What is a cram down in bankruptcy?
We’re answering this question a lot lately more than likely because of the headlines Citigroup — among the largest financial institutions on the planet — has recently made with its support of the measure. So let’s touch on it real quick just to ensure that everyone is familiar with the term. A “cram down” is [...]

We’re answering this question a lot lately more than likely because of the headlines Citigroup — among the largest financial institutions on the planet — has recently made with its support of the measure.

So let’s touch on it real quick just to ensure that everyone is familiar with the term.

A “cram down” is a forced loan modification that is determined by a judge (not a lender) in bankruptcy court. It essentially gives a judge the power and authority to adjust a home loan with the intent of making it more affordable for the cash-strapped homeowner.

Typically, lenders such as Citigroup don’t support “cram downs” — they would rather negotiate and modify loans on their own terms … or not at all.

But with the shaky state of the economy — and more and more troubled mortgage borrowers falling deeper into debt — it appears that Citigroup is willing to go along with a possible major plan to help alleviate the foreclosure situation.

Is it an effective solution?

The Mortgage Bankers Association doesn’t seem to think so, arguing that “allowing bankruptcy courts to reduce the size of a home loan will add considerably to borrowing costs for future homebuyers.” In addition, the American Bankers Association contends that “overly broad mortgage cram-down authority and other provisions will harm thousands of banks across the country that have made, and continue to make, good loans.”

Currently, as of this posting, bankruptcy judges can not “cram down” mortgages on primary residences — it is limited to certain personal loans and mortgages on vacation homes.

That could all change very soon, however, with a new regime taking control of the White House next week. Stay tuned to Foreclosure.com for more updates on the “cram down” situation.