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Cramdowns

A debate is raging in Washington, D.C., about how to deal with America's foreclosure problem. One proposal is to restructure the loans using a tool usually seen in bankruptcy courts: The "cramdown." Senior Editor Paddy Hirsch explains.

About the author

Paddy Hirsch is a Senior Editor at Marketplace and the creator and host of the Marketplace Whiteboard. Follow Paddy on Twitter @paddyhirsch and on facebook at www.facebook.com/paddyhirsch101
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I wish I had seen this sooner - at least to clear up confusion. The analogy to the home is NOT good because chapter 11 (business) and chapter 13 (consumer) bankruptcies apply cramdown in 2 very different contexts - with two sets of rules. I know it's just an analogy, but I think it has caused confusion between the two types of bankruptcies. (I WILL TRY TO COME UP WITH A DIFFERENT EXAMPLE.) Especially because mortgages on primary home residences CANNOT be modified in bankruptcy (meaning - banks are not required to change the principal - and they don't). In 2005 also chapter 13 was revised to reduce the possibility of cramdown for consumers (while chapter 11 was largely left the same). These are chapter 13 (consumer - citizen) issues. The cramdown process in the business world should not be conflated with this.

Paddy, your Whiteboard on Cramdowns was very good but you forgot one item. Did you ever stop to think of all those people who are looking for a house after being priced out of the market? Did you ever stop to think of all those people who played by the rules and did not buy anything because they could not afford the price of a house? Now the price is down to a level I can afford - in California. I am looking forward to getting a nice foreclosure at a fair price. I am sorry for the person who spent too much. All I can say is learn that not everything keeps going in value for ever. Just remember these people paid too much and as a result the cost of homes went up for everyone. Good story, good information, keep it up but think of other people in the equation.

Chapter 13 cramdown was made years ago for the rich (trump people) they can keep their vacation homes, yachts, fancy cars whatever, but the working class that got into this mess can't. It should be the last resort but never the less still available to the little guy

I am hoping for the cram down program. I bought my home for 145,000.00 in 2001. I put 50,000.00 down, and refinanced more than once to do home improvements. Now, I owe over, 260,000,00. Due to the market, my home has decreased in value by 57,000.00. I am behind im my mortgage payments, and my home is being forclosed on. I was out of work for 3 and a half months. Just enough to set me behind in my paymets by 4 months. My lender refuses to do any loan moditication, and I have been back to work since Jan. I think the cram down program would help the people that need it the most. The little people, like me. The banks have the money to work with us. Why don't they???
Hopeful,
Kathy Hart

Thank you Paddy. More of this information needs to get to the general public rather than the "experts" who travel the business show circuit expounding their B.S. from their Ivory Towers (aka the Hamptons, Long Island where they live).

The American Bankers Association needs a good cramdown of a shite sandwich rather than cake since their market expertise has put us in this mess.

If they get tax payers money carte blanche (sp?) this is what we the people get in return.

Can't have your cake and eat it too...

I love these Whiteboard clips. Very informative and easy to digest. I am a software instructor and course developer and would like to do something similar for snall snippets of software training. I am wondering what tool you used to develop your marketplace whiteboard presentations? Did you find it reasonably easy to learn to use this application?

Thanks,
Elizabeth

So I guess a cramdown means nothing to my situation. 3 years ago at the height of the market I bought my home for $244,000. After a down payment and 3 years of paying over the monthly minimum I now owe about $183,000. My home is now valued at $185,000.

Am I totally screwed either way? I can't get a cramdown because I am technically in the black on the house, but still I am paying $244,000 for a $185,000 home. Is it too late to say forget it and forclose me now or what?

Have mergers that rely on easy credit from investment banks, private capital firms(Cerberus) or over inflated stock prices, significantly added to the present bubble?
For Example
Confronted with an obsolete business model (dial-up internet portal(MercK) AOL used an inflated stock price to help purcahse Time-Warner.
How is this action different than homeowners over-estimating their personal worth and spending money they don’t have?
Don’t these mergers (ie Maytag Whirlpool) lead to ineffective debt burdened companies?
When a Dow Chemical merges with a Union Carbide does that usually lead to a net gain or loss of R&D Money?
Does to much easy and a hunger for short term profit, lead to unnecessary mergers and acquisitions that in the end cannibalize industry by loading it with long term debt?

These are the best economic class ever! Thank you Market Place Amigos!

The problem I have with "cramdowns", or principal reduction on a loan, is that the only person who has access to the lowered price of the home is the person who lied (by borrowing huge sums of money from a bank) to price every other legitimate buyer of that home out of the bidding war, and then defaulted on the loan. There are other people who could buy that home at the reduced price (and put down a significant downpayment or buy it outright with no financing) if the home were put on sale at the lowered price. Why let a liar, a thief, and a loan defaulter (who obviously has bad credit) be the only consumer to have access to the lowered price on a home? That is not free market, nor fair market. Homes that are not paid for by the lendee should be put on the market for all consumers to have a fair chance of buying that home at legitimate market value (where legitimate market value is determined by the consumer who can actually pay for it).

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