Mortgage Cram Down Legislation Is Defeated In The Senate

Real Estate Broker/Owner

The Senate defeated the proposed mortgage cram down bill 51-45 on Thursday, falling 15 votes short for a bill that would have allowed judges to modify home loans through bankruptcy.

Specifically it would have allowed judges to either lower the interest rate and or reduce the principal on loans for primary residences.

Let me be the first to say that I was not crazy about the bill as it could add another element of risk for banks in the mortgage market.  And not that I am worried about banks, but the result could have been increased borrowing costs for all consumers in order to offset this broader risk.  For better or worse, we now may never know.

The unfortunate reality is that underwater or zombie homeowners, over 8 million in number, continue to present a systemic risk to the housing market, banking system, and broader economy.  In the absence of a real housing stimulus, or a massive government bailout, these zombie homeowners will continue to be a headwind to a housing and economic recovery.  Underwater mortgages are a pre-condition for default, especially during times of rising unemployment.

What is ironic about the failure of this legislation is that there is a double standard in Washington.  The banks have been the recipient of massive government assistance, all in the name of "credit".   From the TARP to the PPIP, to the incredibly favorable tax treatment they have received, the government has done everything and anything to make sure the banks will not fail. 

But when it comes to the American people and homeowners, it becomes very clear who our representatives actually represent.




Comments (18)

Goodbye Active Rain
Out of Real Estate

There is always 2 sides of the coin.  Bank risk or more people suffer.  Which should we choose?

May 02, 2009 02:39 AM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

It is interesting in light of this that some still praise Obama of thinkin g of little person.

Tony, there is another approach: just let the market correct itself. We are in this not because of not enough governmental control, but because of the opposite. Setting the precendent and making it more expensive to borrow would affect way more than 8 Mil and for indefinite time. And you still find it a worthwhile idea?

Are we that crazy to believe that judges are the best candidates to run the mortgage business?

May 02, 2009 02:45 AM
Tim and Pam Cash
Crye-Leike (Sango) - Clarksville, TN
Real Estate Professionals - Clarksville TN

The banks and the auto industry appear to have a choke hold on those elected officials in Washington.  While I dont agree that judges should be deciding who much a home is worth I do agree that a REAL housing stimulous plan needs to come forth sooner rather than later.

May 02, 2009 02:49 AM
Steve Loynd
Alpine Lakes Real Estate Inc., - Lincoln, NH
800-926-5653, White Mountains NH

Mark.. I'm a bit ambivalent about the vote, judges could have streamlined some needed decisions that are holding a broader recovery back. But as you state the banks would find a way to get back their pound of flesh from new transactions which would put more expenses on new financed sales, which are much needed now.

May 02, 2009 02:55 AM
Katiejo Franks
Real Estate and Beyond, LLC - Scottsdale, AZ

I am so thankful that it did not happen. That would of been a nightmare on elm street or wall street or ? street. There is another day coming

May 02, 2009 03:21 AM
Tim Monciref - Austin, TX
Over 2,000 homes sold…..

One either believes in markets to fix themselves are the government to fix the market.  The cycle moves back and forth and back and forth.  The tide always changes........

May 02, 2009 04:40 AM
John Mulkey - Waleska, GA
Housing Guru

Mark, I've never been a supporter of allowing judges re-writing loans, but the amount of money already spent to help banks seems ludicrous.  The government is still seeing the problems in a backwards fashion, and until they stop meddling with big business, little will improve.

May 02, 2009 04:43 AM
Terry Haugen STAGE it RIGHT! 321-956-2495
Stage it Right! - Melbourne, FL

Mark, score one for the banks, again!  And who said feverish lobbying doesn't work?

May 02, 2009 06:05 AM
Mark MacKenzie
Phoenix, AZ

Tony:  Thankfully we don't have to decide, Washington already did that for us. ;)

Jon:  All worthwhile points.  As I said, I don't have an answer to this, only that the double standard in Washington is frustrating.

Tim & Pam:  Agreed.  I am still dumb-founded how we skipped over implementing a housing stimulus and went directly to bailouts.

Steve:  Ambivalent.  THAT is the word I was looking for. :)

Katiejo:  I think the failure of this bill will continue to put the housing market in a precarious position moving forward.  The under water homeowners are going to turn into the 8000 lb gorilla in the room as home values continue to erode. 

Tim:  I am not sure what we have right now in terms of a relationship between markets and government, it keeps changing.

John:  Backwards indeed.  The solution is from the bottom-up, not top-down.

Terry:  It is disgusting, isn't it?


May 02, 2009 08:18 AM
Terry Haugen STAGE it RIGHT! 321-956-2495
Stage it Right! - Melbourne, FL

Yes it is disgusting.  Here in FL the banks must go to mediation before they foreclose, and they must, from what I've heard "product the document" the original document.  Foreclosures go before a judge here, why not housing driven bankruptsy?  I'd love to know whose palm were greased to get their vote.  Why is congress even listening to the banks after what they have done and received from us?

May 02, 2009 10:03 AM
Sandra White
John L Scott Real Estate - Port Townsend, WA
Experienced Residential Resale Broker

What worries me is if the courts can force a bank to cut interest rates, erase principle or other wise change the contract, then in the future if banks need more money perhaps they could raise the rates on every ones fixed rate.  I think its called abrogating the contract. 


May 02, 2009 10:32 AM
x Bye Bye
x - Bay Minette, AL
Delete Account

Mark - I too was concerned about this bill.  One element that was not talked about very much was would a contract be a contract if this bill had pass.  We all deal with contracts and when we sign one we are sure it is binding.  This bill would have set a precedent for future bills that could let judges change more types of contracts. 

May 03, 2009 12:03 AM
John Walters
Frank Rubi Real Estate - Slidell, LA
Licensed in Louisiana

Mark I wasn't a big fan either.  There is no easy answer even though some may think so.  If this was allowed and I am a bank.  I am out of the business of home loans.

May 03, 2009 01:51 AM
Kevin Robinson
Twin Falls, ID
Fractional Developer

Mark- Nice post. I am featuring this in Tea Party.

May 03, 2009 02:21 AM
Mark MacKenzie
Phoenix, AZ

Terry:  Here is a link to an article about the vote.

Sandra:  I don't know if that is true.  I think the only way that could happen would be through a court action, I could be wrong.

Brian:  Agreed.  My only frustration is the double standard in Washington with banks versus the homeowners.

John:  I agree completely, it would have changed everything.

Kevin:  Thank you very much and congratulations with the success of your group.

May 03, 2009 02:29 AM
Mike Saunders
Lanier Partners - Athens, GA

Mark - I am not sure what the fix should be, but I am pretty sure that the cram down was not the solution. As for who the government represents, it's obvious, those that can line the most pockets.

May 03, 2009 10:59 AM
Alice Linahan
Voices Empower - Argyle, TX


We are a country of laws, and a contract is a contract is a contract.

If we give judges the power to rewrite the contracts our freedom is lost. It is time we stand up and fight for freedom.


Here is an example coming out today!!



May 03, 2009 02:10 PM
Mark MacKenzie
Phoenix, AZ


Don't get me wrong, I am not advocating for this bill.  But this is what judges do, they void contracts when BKs are filed.

Additionally, there is already a precedent that allows judges to modify loans on vacation homes.

My point is that the failure of this bill has little to do with ethics and constitutional law and very much to do with politics and banks.

May 04, 2009 11:47 AM