Mortgage Cramdown a Foreclosure Option on Investment Property
When you receive papers stating that your bank will be filing foreclosure against you on an investment property consult with Eric Lanigan or Roddy Lanigan foreclosure and bankruptcy attorneys in their Winter Park, Florida, office to find out what your options may be.
The basic idea of a cramdown is that a judge strips the loan into two parts: a secured loan, with a principal equal to the current value of the asset; and the equity line or the second mortgage usually an unsecured loan, with a principal equal to the rest of the original mortgage.
Mortgage Cramdowns for Investment Properties
The payments on the secured loan may be decided with a new principal plus an interest rate that offers a reasonable compensation for risk, possibly Prime plus one to three percent. Meanwhile, the unsecured portion is moved down in the payment queue with the other unsecured debt; very little of this is ever paid off.
Congress never authorized bankruptcy judges to modify mortgages on primary residences so these cramdowns are only for investment and vacation properties. The amount of the cramdown varies by state, property value and borrower situation but usually includes a reduction in the principal amount of the loan to fair market value.
The bankruptcy cramdown was part of the original language of the Helping Families Save Their Homes Act of 2009 and would have amended the federal bankruptcy law governing a Chapter 13 bankruptcy debtor to allow judges to alter the terms of mortgages on primary residences.
Bankruptcy judges could only modify the terms of mortgages on investment properties and vacation homes but not on primary residences. At one point the proposed provision in the legislation would have allowed a bankruptcy judge to:
- Reduce the principal amount to the fair market value of the property
- Reduce the interest rate
- Extend the term of the mortgage up to 40 years
- Prohibit, reduce, or delay the adjustment of an adjustable-rate mortgage (ARM)
- Waive prepayment penalties
The cramdown was criticized because it would have allowed borrowers to be rid of contractual obligation to repay the full amount of their loan. Cramdowns would have made it expensive for other individuals to purchase a home because lenders would have had to increase interest rates and down payments to supplement the loss from the loan modification, the research firm explained.
When a bankruptcy judge reduces the principal amount of the loan to the fair market value of the property, the amount of the write-down becomes an unsecured debt that will be paid pro rata along with any other unsecured claims that the borrower has, such as credit cards.
Unsecured Mortgage Debt Losses
As a result, the unsecured portion of the mortgage debt–the cramdown amount–will likely result in immediate losses to residential mortgage-backed security pools, which may cause other classes to be written down faster.
Once it becomes more widely known that bankruptcy judges are using cramdowns on first mortgages in certain situations there will be more prevalent among individuals trying to find an alternative to foreclosure on an investment or vacation property.
Find out what the options are available to you instead of a foreclosure by consulting with Winter Park foreclosure attorneys Eric Lanigan and Roddy Lanigan to make the best decision in your financial and economic situation.