Monday, September 20, 2010

The Argument for Cram Down

It is a fact that there is a loan loss guaranty protecting banks from residential real estate loan losses... WaMu, Wachovia, Downey and Indymac were either seized or forced into selling to Chase, Wells Fargo, US Bank and OneWest Bank... Each buy/sell agreement contained a loan loss protection condition.

Thus, even though the bank's assets (loan portfolio) was sold in the range of 55-70% on the dollar, the treasury (you and me) guaranteed to cover any losses... based on not the purchase price, but instead 80% of the ORIGINAL loan amount, PLUS any delinquencies, thereby guarantying that the acquiring banks would turn a profit... AND that in the vast majority of instances they would refuse to cooperate in loan modifications... there is far more profit for them... which bodes the questions why not use cram down, forcing the banks to modify loans in principal, rate and term... and still give them the guaranty dollar amount...

Net result to the bank is identical... with the plus to the community of keeping people in their homes... stabilizing real estate values AND most important of all end the hemorrhage in real estate tax revenues... a true win - win compromise...

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