By Elliot S. Schlissel
Jan. 4, 2011
There are various techniques that can be used to modify mortgages. Homeowners can apply to their banks for mortgage modifications. If the homeowner files bankruptcy, he or she can take action to force a bank to write off portions of the principal of the mortgage loan. This is called a “cramdown”. The cramdown allows the judge to recompute the valuation of the property that the mortgage is attached to. The court can revalue the property at its current market value. The bankruptcy court can then modify the mortgage to bring it into conformity with the actual value of the real estate. This would be of great help to homeowners whose property is “under water”.
In cramdown situations, the balance of the mortgage does not cease to exist. It now becomes an unsecured debt. It gets paid off on the same basis of other unsecured debts such as credit cards. In addition to mortgages on homes, cramdowns can also be accomplished concerning car loans, loans on boats, loans on investment property and second homes. The cramdown provision specifically applies to secured debt with one significant exception. The mortgage on a person’s primary residence is not subject to being cramdowned in bankruptcy court.
It is unfortunate that cramdowns on primary residence mortgage loans cannot help the millions of Americans whose homes are now subject to foreclosure. Cramdowns on mortgages for anindividual’s place of residence were allowed until 1978 on a national basis. An amendment of the bankruptcy statute to allow the cramdown provision to apply to an individual’s principle place of residence would be a means of accomplishing mortgage modifications.
The United States Constitution reserves the right to Congress to make all laws concerning bankruptcy. Bankruptcies are federal proceedings. It would take congressional legislation to amend the bankruptcy code to allow cramdowns on homeowners’ residences. The banking industry has many friends in Congress and they are against this modification of the bankruptcy code. The Obama Administration has also not acted very enthusiastically when presented with the option of modifying the bankruptcy code to allow cramdowns as a form of mortgage modifications.
The use of cramdowns in bankruptcy proceedings would be a way for homeowners to defend foreclosure proceedings and this would impact the foreclosure crisis in the United States.
Elliot S. Schlissel, Esq., is the former President of the Commercial Lawyers Conference of New York. For the first 15 years of his career, Mr. Schlissel represented creditors. For the past 18 years he has assisted homeowners in foreclosure defense. His office is located in Lynbrook, Long Island, New York and he can be reached at 1-800-344-6431.
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