Homebuilders Now Support Mortgage Cram Down

December 10, 2008 No Comments »

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In a surprise move, homebuilders have shifted their stance on so-called “mortgage cram downs,” which allow bankruptcy judges to modify the terms of home loans tied to primary residences.

Jerry Howard, chief executive of the National Association of Homebuilders, said in an interview Tuesday that he supports a temporary provision that would allow such modifications in what looks like the latest attempt by builders to save their ailing industry.

But many fear such legislation would further restrict the flow of consumer lending and raise interest rates one-and-a-half to two points higher.

One such opponent, the Mortgage Bankers Association, has argued that if such a proposal were to become law, mortgage lenders would have greater difficult in accurately appraising property values, leading to higher down payment requirements and associated closing costs.

Earlier in 2008, several bills aimed at giving bankruptcy judges the power to modify the terms of mortgages failed to gain enough traction to become law.

However, yesterday, Senate Majority Leader Dick Durbin (D-Illinois) brought the subject up again, saying he would attempt to pass a similar bill again at the start of the New Year.

Consumer advocacy groups have argued that such a measure could help at-risk borrowers negotiate more effectively with their lenders to avoid foreclosure, pointing out that bankruptcy judges can modify terms on second homes and yachts, but not primary residences.

It’s unclear what types of mortgages such a bill would cover, though it could be limited to certain subprime or “exotic” offerings originated during a specified time period.

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