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Mortgage Bankers Association's Cramdown Claim Debunked

posted by Adam Levitin

I have received several inquiries about the Mortgage Bankers Association's spurious claim that permitting modification of mortgages in bankruptcy will result in higher interest rates or less credit availability. I have drafted a very short explanation of why the MBA's claim is patently false and in fact disprovable. It is available here.


This seems like a misleading post. There is a difference between saying cram downs won't lead to higher interest rates and saying that the amount of potential increase claimed by the MBA is wrong. Also, could you explain the difference between the problem with not being able to modify mortgages because they are tied to contracts of mortgage backed securities while changing the factors that formed the basis for a mortgage contract? If someone loans their money based on a set of possible conditions set in law, isn't changing those legal conditions after the fact wrong? What would you say if lawmakers made changed non-recourse loans into ones where lenders could seek deficiency judgments?

Anyone advocating for Federal legislation to retroactively modify the terms of a debt contract should closely read the opinion in Lewis V. United States Department of Higher Education, US App. 9th Circuit 506 3d 927, 2007 which deals with the issue of an old student loan which became nondischargeable in bankruptcy due to an act of congress more than a decade after the debt was incurred. The Constitutional bans against ex post facto laws and laws impairing the obligation of contracts apply only to states. The issue of a non-recourse mortgage debt becoming a recourse debt is similar and is a real cause for concern, especially if there was an intervening bailout involving taxpayer money and Congress decided that homeowners who took advantage of it should bear more of the costs.

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