This particular idea has been talked about in Washington for quite some time but has repeatedly failed to get the needed traction to get passed into law. The basic suggestion of it is that it would let judges alter mortgage terms for borrowers who are in bankruptcy court. The judges could tinker with the principal balance, the interest rate and the length of the loan, or any combination of the three. The major holdup has seemingly centered on the original "cramdown" provision that would allow the principal balance be brought down to the home's market value. That's what the financial community has been fighting against the most.
One of the major banks has now obviously changed its mind about that. Citigroup Inc. has reached a deal with key Democrats in the U.S. Senate to go along with this plan. What caused it to do so is at this point unclear, but Citi, among many other banks, has been criticized harshly by Congress for accepting federal bailout money by the billions and then doing practically nothing to help out homeowners in distress. That may have done it.
The cramdown proposal would cover every mortgage out there, from subprime to A paper, so long as they were underwritten before this bill goes into effect. If it indeed happens, bankruptcy courts are going to be busy for the foreseeable future. Borrowers are likely to get a more balanced hearing in the courts than trying to negotiate directly with their lenders, so they'll choose to go that route. Banks' real estate collateral is also going to take a beating, although that has already been going on for a year or two as housing values have kept on sinking. Either way, it hurts.
Citi is the first to do this. The overwhelming belief now is that others will soon follow. Had the banks that received federal tax dollars last years acted more responsibly with it, this may have been avoided. Anyway, when the bill is written, it ought to have very clear language about how it works. It should leave no room for misinterpretations and loopholes.