Cramdown Rules to Hit Unsecured Creditors, Depending on Language

While the House Thursday passed legislation that would enable homeowners meeting certain conditions to lower their payments -- and in certain cases, principle owed -- through bankruptcy courts, how much help the cramdown legislation will be for the current economic situation is still the subject of much debate. Meanwhile, some in the accounts receivable management industry are warning that the plan could have a strong impact on collections.

It’s likely to be weeks before the Senate acts on the legislation. Based on what happened with the stimulus bill, the legislation could go through some significant changes before it gets approval there, though continuing deterioration of the economy could speed the process along.

There’s also plenty of opposition to the idea of changing mortgage terms.

“The ABA [American Bankers Association] has consistently opposed proposals that would give bankruptcy judges broad authority to unilaterally modify the terms of mortgages,” the association said in a statement. “Such proposals would bring additional risk and uncertainty to an already volatile mortgage market and would make home loans more expensive and less available for consumers.”

Yet others say the cramdown legislation should provide some more relief for the weak economy.

“This is one of many bandages on the [economic] problem,” said Dan North, chief economist at Euler Hermes ACI, a trade credit insurance firm. “The good thing is that the [House legislation] gives homeowners a real incentive to work out the deal first.”

The legislation has already gotten many in the ARM industry wondering how the new rules may impact their business (“Mortgage ‘Cramdown’ Rules Could have Major Impact on Debt Buyers,” Feb. 25).

Last week on insideARM’s executive conference call, “Current Indicators of Consumer Financial Health and Their Impact on Receivables,” Rui Cardoso, president of bankruptcy purchasing and collection specialist B-Line LLC, said that the impact on the ARM industry will depend on how the deficiency balance, created by cramming down the mortgage, is treated in court.

“If that deficiency balance is waived, then it will free up more money for unsecured creditors,” said Cardoso. “If the balance becomes an unsecured claim, you now have a very large debt that will absorb dispersals on a pro rata basis.”

Cardoso also noted that tweaks in language in the Senate and in bill reconciliation could cause the final product to range from “positive to terrible” for the bankruptcy segment of the ARM industry.