Cramdown

Jill Korenaga

Fed is set to launch a much awaited TALF program to spur lending for autos, credit cards, small businesses and education. The Term Asset-Backed Securities Loan Facility is a $200B plan. Stocks and Bonds hugging the flat line. The cramdown bill hopes to get to the House floor by this Thursday. What may happen is that it will allow bankruptcy judges to modify home loans.
Okay, imagine you are a lender for a moment. Would you rather work it out directly with a borrower in default or wait for the court to step in and call the shots? Bankruptcies are already on the rise meaning once a borrower on a loan that I'm servicing files for BK the process could be lengthy and how much more that might cost me (as a lender). In fact, I think it might be better all around to staff up, if needed, and send in life boats NOW.
I know that GMAC and IndyMac have already begun to move proactively. The GMAC deal is a loan mod on an Option Arm that never defaulted on a payment. The IndyMac one was orignally an 80/20 purchase in Jan 2007. Although the borrower's had to go late on their payments the loan mod sounds like a pretty sweet deal. I expect we'll be seeing more of this and I think it's a testament to how effective borrowers can be on their own without forking out 2 - 3 grand to have someone liason on their behalf. I have heard lots of talk on how successful (hopefully effective) the loan modification market has been are but I've yet to see it with my own eyes. (and I have asked)