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The US House of Representatives is scheduled to vote Thursday on a bill that will enable homeowners to modify their mortgages in chapter 13 bankruptcy.

These mortgage modifications are known by the more vernacular term, “cram downs.”  Under the proposed law, a bankruptcy judge could reduce the balance of a first mortgage to fair market value and re-amortize it, reducing the monthly payments and making it easier for financially distressed homeowners to keep their homes.  Chip Parker of Bankruptcy Law Network explains in detail here.

This legislation would help stem the tide of foreclosures by encouraging lenders to cram down mortgages out of court on terms they negotiate with the homeowner rather than having a bankruptcy judge impose them. 

Either way, fewer economically strapped homeowners would lose their homes and house prices in neighborhoods decimated by foreclosures would have a chance to stabilize.

Members of the mortgage industry are rattling the bars of their playpens in protest.  Permitting chapter 13 mortgage cram downs would have long-term regulatory side effects, as described in “Just Say Yes To Cram Downs” by the late, great Tanta of Calculated Risk:

In fact, I have some sympathy with the view that mortgage lenders “perform a valuable social service through their loans.” That’s why, when they stop doing that and become predators, equity strippers, and bubble-blowers instead of valuable social service providers, I like seeing BK judges slap them around. Everybody talks a lot about moral hazard, and the reality is that you’re a lot less likely to put a borrower with a weak credit history, whose income you did not verify and whose debt ratios are absurd, into a 100% financed home purchase loan on terms that are “affordable” only for a year or two, if you face having that loan restructured in Chapter 13.