Currently, bankruptcy judges do not have the power to modify the principal of residential mortgages during Chapter 7 or Chapter 13 bankruptcy. But many on Capitol Hill are suggesting that the Senate may revisit mortgage modifications that include the reduction of principal (aka cramdowns) in the near future. Many analysts are saying that bankruptcy cramdowns may be the only way to effectively tackle the foreclosure crisis and save up to 6 million homeowners from foreclosure over the next few years. Right now two of the principal problems forcing homeowners into foreclosure are unemployment and home values that are significantly less than the balance of the mortgage owed. If bankruptcy judges are given the power to reduce the principal balances of underwater mortgages, we could prevent many more foreclosures and keep homeowners in their properties.
Unfortunately, many mortgage lenders are vehemently opposed to mortgage cramdowns during bankruptcy. Mortgage lenders recklessly sold overpriced homes during the real estate boom and pushed toxic mortgages onto homeowners and now they are refusing to take responsibility for how their actions have facilitated the foreclosure crisis. Mortgage lenders also refuse to suffer any consequences for their culpability in the foreclosure crisis and refuse to absorb any portion of the financial losses being heaped upon homeowners and foreclosure plagued communities. By allowing bankruptcy judges to cramdown mortgages we are relieving homeowners of some of the financial pain that foreclosures inevitably bring and giving mortgage lenders an incentive to engage in fair lending in the future. Once mortgage lenders realize that homeowners can cramdown mortgages in Chapter 7 bankruptcy or Chapter 13 bankruptcy they will think twice about engaging in the reckless behavior that has played a major part in creating this crisis.