So the bankruptcy cram down bill is currently stuck in the Senate. Opponents (read: the banking industry, and a few "let them eat cake" conservatives) continue to tell the lie that cram downs in bankruptcy will make home loans so much more expensive than they would be otherwise. I think they hope that if they tell the lie enough times, it will be accepted as the truth.

These people are full of it. Make no mistake, it is a bald faced lie to claim that bankruptcy cram downs will cause significant increases in home loan costs, or decrease availability.

Recently, I posted about Professor Adam Levitin's analysis of cram down's actual effects on mortgage costs and availability. After reading his entire paper, it seems I left out some very important information. My prior post talked about the historical period when some parts of the country allowed cram downs and others did not. But there is even more evidence that cram downs do not affect loan pricing and availability.

Professor Levitin also did an exhaustive comparison between owner occupied single family residence loans (that cannot be crammed down under current law), with other loan types: rental properties, vacation homes, and multi-family dwellings where one unit is owner-occupied (all of which can be crammed down under current bankruptcy law).

Now, if the lending industry's claims about cram downs is true, one would expect to find two-tiered pricing: lower pricing for owner occupied SFR loans, and higher pricing for the other property types, since the other types are subject to cram down risk.

The actual result? For the nearly 300 loan quotes that Professor Levitin received from four major lenders, pricing for owner occupied SFRs was exactly the same as for vacation homes, and at least one of the multi-family property types. This is in spite of the fact that vacation home and multi-family loans are already subject to cram down.

In short, there is no real risk of increased loss to a lender in a cram down. The reason is actually quite simple: lenders usually make more money even on a cram down modified loan than they would in a foreclosure. Here's why: in a cram down, the principal balance is cut to the current market value of the property. The borrower has to make loan payments on that principal balance, at an interest rate that equals current market rates for a conforming fixed-rate loan, plus a "risk premium" of 1 to 3 percent, to protect the lender. At current rates, the lender will receive 5.5% to as much as 8%. By contrast, if the lender is allowed to foreclose, they have to spend about $70,000 to take back the property, hold it, get it ready for resale, and resell it. This means that the most a lender can hope to recover in a foreclosure is current market value less about $70,000 - and that's assuming the market value of the property holds steady. All the while, the lender is collecting no interest payments.