Would Cramdowns Cut Foreclosures?

Washington-Congressional supporters of bankruptcy cramdown legislation found vindication in a recent report by Credit Suisse that says bankruptcy reform could make a sizable dent in foreclosures.

"We expect the bankruptcy plan will provide about a 20% reduction in foreclosures," the Credit Suisse research report says.

The CS analysts also concluded that passing a bankruptcy reform bill that allows judges to reduce or cram down the principal amount of a mortgage would put "pressure" on servicers to modify more loans.

"We expect the new bankruptcy reform will increase loan mods, particularly principal reduction mods, as it is likely to both pressure and also give justification to servicers to more actively pursue principal reduction mods," the CS report says.

Democratic members of the House Judiciary Committee frequently quoted liberally from the Credit Suisse report while the committee considered amendments and passed a bankruptcy bill by a 21-15 party-line vote. The bill (H.R. 200) eliminates a longstanding exemption that protects mortgages on a primary residence from being modified in bankruptcy.

The committee rejected an amendment by Rep. Trent Franks, R-Ariz., to limit bankruptcy cramdowns to mortgages originated from 2004 through 2008. The Franks amendment also had a sunset provision, which the mortgage industry believes is critical, so the cramdown authority expires after a few years.

As MSN went to press, House speaker Nancy Pelosi was working on bringing H.R. 200 to the floor for a vote, despite strong opposition by the financial services industry.