Editorial: The Cramdown Question.(Editorial)

Several years ago, creditors won an important legislative victory when Congress tightened bankruptcy laws, restricting the ability of consumers to discharge debt and protecting mortgage lenders from cramdowns. The mortgage lenders secured exemption from having mortgage amounts reduced was preserved.

But now the issue of cramdowns has surfaced again, and it could have a big impact on mortgage servicers, especially with a rising tide of defaults forcing them to manage more bankruptcy cases.

The Home Ownership and Mortgage Equity Protection Act of 2007, pending before congressional committees in Washington right now, would allow judges to reduce, or cram down, the amount of secured debt on primary residential mortgage loans. Mortgage Bankers Association chairman-elect David Kittle, in testimony before a House committee, argued that such a measure will cost consumers money in the long run by restricting the flow of capital into home loans and making mortgages more expensive. The bill, he warned, chips away at the security created on home mortgages.

In the past, legislators and courts with a few notable exceptions have respected the security instrument of a home mortgage and declined to tamper with it, reasoning that mortgages for homebuyers are cheaper and more widely available in America than ...