Today's Wall Street Journal reports that the proposal to grant bankruptcy judges the power to rewrite or "cram down" primary residential mortgage is "gaining steam." It futher reports that this proposal is gaining momentum in the Democratic controlled Congress as evidence mounts that the current voluntary foreclosure mitigation programs are falling short. For example, The Hope for Homeowner's program was supposed to help 400,000 homeowners avoid foreclosure, but so far only 37 homeowners have signed up due the narrow eligibility requirements.
The cram down proposals would give the Bankruptcy Judges the power in certain circumstances to reduce principal, reduce interest rates, and extend terms. Bankruptcy Judges presently have the power to modify mortgages that are not secured only by a principal residence, such as a vacation vacation home, but they are prohibited from modifying mortgage secured only by a lien on a debtor's principal residence.
Proponents of bankruptcy reform note that about one in six houses in now worth than the amount owed on the mortgage, ie. "under water" and that only a program that reduces the principal owed and restores equity to homeowners is likely to stem the tide of foreclosures. Proponents of bankruptcy reform also note that without bankruptcy reform mortgage servicers are having difficulties modifying mortgages that have been carved up and sold to investors as part of mortgage backed securities as the mortgage servicers as uncertain of their liabilities in agreeing to a modification. Indeed recently Countrywide and Bank of America were sued by mortgage certificate holders due to their contention that they will bear the economic brunt of the settlements reached with the various Attorney Generals.