When I hear the term "cram down" authority in the bankruptcy context, I keep picturing some poor mortgage lender warily stepping into a bankruptcy judge’s chambers only to have a long metal pipe shoved down his throat until the lender is willing to give in on a loan modification. Only a month ago it appeared that bankruptcy judges were on their way to wielding such foie gras power.
While a "cram down" bill made it through the House of Representatives in March, Senate Bill 61 met fierce resistance and failed to muster the necessary votes to pass. Brett Weiss, a bankruptcy attorney in Maryland, provides some excellent insight in his article as to why Senate Bill 61 bill could not pass despite President Obama’s apparent 100-day mandate clout and a Democratically controlled Congress. One is left to wonder why President Obama, who supported such "cram down" authority was unwilling to use some of his political capital to see this one through.
Senate Republican Leader Mitch McConnell of Kentucky seemed to echo the standard line being floated by the likes of J.P. Morgan Chase & Co., Bank of America Corp., and Wells Fargo & Co, namely that the vote was "a bipartisan rejection of an interest-rate hike, which is exactly the wrong solution for jobs, homeowners and the economy."
However, as Brett Weiss notes in his article, mortgage insurance was the real issue. Mortgage insurance gives lenders a very strong incentive not to write down principal, and gives them more money if they foreclose, even where the property is sold at a significant loss, than to work to make the loan performing. In the end it seems that saving the likes of the stronger financial institutions was more practical than forcing the likely failure of MGIC, RMIC and Genworth, mortgage insurers already on the ropes.