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February 25th, 2009

FDIC head says: We need cramdowns



We noted previously that cramdowns are coming, courtesy of legislative action moving through Congress. To refresh your memory, it’s an involuntary loan modification: a cramdown happens when a bankruptcy judge reduces the principal amount of an outstanding mortgage.

In a recent interview on National Public Radio, the head of the Federal Deposit Insurance Corp. admitted that she supports cramdowns:

“The carrot is agreeing to share some of the costs associated with lowering the payments,” Bair says, adding that those subsidies will benefit both homeowners as well as those who service and own the mortgage.

“The stick is really the administration’s support for bankruptcy reform, which basically says that if the loan continues to be unaffordable, and the borrower goes to bankruptcy, then a bankruptcy judge has the authority to do a cram-down, which is to reduce the principal amount on that loan to whatever the current appraised value is,” she says.

How this will impact the government’s still-embryonic plan for voluntary loan mods is unclear. It will, however, add yet another layer of complexity — to say nothing of uncertainty — to the mortgage and credit markets. As we noted in that post:

Mortgage cramdown legislation, if passed, would likely lead to rising losses for home equity and credit card lenders, while also reducing housing affordability, Friedman, Billings, Ramsey & Co. analyst Paul Miller wrote …

In bankruptcy proceedings, Miller said judges are likely to wipe out home equity loans or lines of credit and credit card debt from customers, leaving those lenders with losses as the primary mortgage is modified. Financial firms with large portfolios of those types of loans are likely to see even greater losses than they’ve already been facing amid the downturn in the housing market and ongoing recession.

There’s also the fear on the part of many industry observers that cramdowns will increase the cost of mortgages for all borrowers. That’s called “the price of uncertainty.”

Rhetorical question: How will inflicting still more losses on financial institutions help the credit markets?

Exit question: Will cramdowns help fix, or will it prolong, the housing-market mess?

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2 Responses to “FDIC head says: We need cramdowns”

  1. James Parsa Says: February 26th, 2009 at 11:18 am

    This should have happened much sooner…

    At this point, home owners that are already facing foreclosure simply don’t have the time for all the legislation to pass through every step for it to actually apply in real terms.

    As a practicing law attorney with over 17 years of experience, I highly recommend that home owners rely less on outside intervening and take the initiative to find a good loan modification company. A loan modification is proven to work and is actually what the government is proposing with a cram down anyway.

    Here are few things to keep in mind though while searching a legitimate company.

    -Watch out for up-front payments and guarantees, they don’t exist with legitimate loan modifications.

    -Take some time to study the field before battle, knowledge is power that can aid you in saved $$.

    -Ask questions and be upfront with all concerns when dealing with a company, be cautious of scams and frauds.

    Here are some more resources for anyone who is interested.





    James M. Parsa
    Attorney at Law
    Parsa Law Group / National Loan Modification Center
    Better Business Bureau Rating:

  2. Rebecca Boyle Says: October 18th, 2009 at 1:39 pm

    Yes as James Parsa says we should all be careful of scams and frauds. “Watch out for upfront payments” yes exactly. I did question that when I retained Mr. Parsa’s firm-the Parsa law Group. I was assured by their Excutive Client Consultant (translate sales rep), Brenden Brickabus that since “we are attorneys, we are held to a higher standard, none of the attorneys at this firm wants to risk their licenses”. I was also told I had to “qualify” with their firm to be sure they could get me a loan modification. After spending a day wondering, I was called and lo’ and behold I DID qualify and was told as soon as I forked over $3,300 the Parsa Law Group would obtain a loan modification for me. It was, as Brenden said “a slam dunk, we deal with Indymac all the time, we know people there” Well guess what? Fastforward, after paying upfront my $3,300 (as did alot of other clients), Parsa Law Firm is shut down, Parsa is suspended and contact with my mortgage company revealed NO ONE from the Parsa Law Group ever had ANY contact with them. I am now in contact with more than 20 other clients who tell me the same story. They paid their upfront fee to Parsa and virtually got NOTHING!

    Worse to know is the State Attorney General for CA had sent a “prove it letter” to parsa prior to my retaining him. Parsa knew he was under investigation but still duped and defrauded clients all the way to the min. his office doors were padlocked by the Feds.

    Parsa: aren’t you the pot calling the kettle black?

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