If Congress approves bankruptcy cram down legislation it should reduce the number of foreclosures. In recent months, many who would previously have filed a Chapter 13 or Chapter 11 to catch up on mortgage payments are letting their homes go in a chapter 7. The payments are too high, or the property value has dropped so much that they are better off not pouring money into an upside down investment area by allowing cram downs, many of these people will be willing to work to save their homes. The lowering of the principle to market value and the interest rate to market rate gives them both the incentive and the ability to keep their homes.
With the recession in full swing, the reduction in foreclosures would help to alleviate the downward spiral of home prices. With fewer rules state owned, or foreclosed houses for sale price below market rates, housing prices won’t keep ratcheting down, with banks constantly lowering prices to get cash, and homeowners needing to sell having to keep reducing their listing to keep up.
Finally, there is only one way to obtain a cram down, it can be done only by those who file bankruptcy. People who did not take an adjustable mortgage, or finance hundred percent of the value of the property, will not be penalized for their judgment, and people who want the benefit of a cram down must also take a bankruptcy filing. Allowing cram downs on residential mortgages should be part of the economic stimulus program currently being debated by the Congress.
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