Monday, September 20, 2010

Cramdowns could raise mortgage rates by 2%

From LA Times.  The Federal Reserve Bank of Cleveland wrote this paper concerning cramdowns and the after affects.  Cramdowns are where a judge will re-write your mortgage into two mortgages: 1) for the full appraised value of your home 2) a second loan which is not tied to your home, like a credit card.  However, this would have an on impact on mortgage rates.
The Mortgage Bankers Assn., for example, says giving judges "free rein to rewrite loan contracts without economic restraint" would drive up the cost of financing for future borrowers by as much as 2 full percentage points.
Because lenders and mortgage investors would no longer be certain their loans would be truly secure, the MBA contends, they would be forced to require larger down payments and charge higher interest rates. "At a time when the mortgage market is experiencing a serious credit crunch, [cramdowns] will increase costs to consumers, further destabilize the mortgage market and hurt the overall economy," the MBA claims.
If judges were allowed to perform cramdowns, this would definitively affect home prices.  This would opposite of the easy credit from the early 2000's. 

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