Zandi: Cramdowns Possible Rx for Foreclosures

A properly designed bankruptcy bill with firm guidance for modifying loans could reduce the number of expected foreclosures by 500,000, Mark Zandi, chief economist of Moody's Economy.com, has told a congressional panel.Mr. Zandi warned that 2 million families could lose their home by early 2009 and that the current cycle of rising foreclosures and falling housing prices could lead to a national recession. "There is no more efficacious way to short-circuit this cycle than by adopting legislation to allow bankruptcy judges the authority to modify first mortgages by treating them as secured only up to the market value of the property," he testified. He suggested that this legislation should sunset after three years so Congress can review its impact. But he dismissed claims by the Mortgage Bankers Association that such a bankruptcy bill would force lenders to increase mortgage rates and fees [see item above]. And the founder of Economy.com testified that current voluntary efforts by mortgage servicers to modify loans is unlikely to stop the increase in foreclosures. The Moody's dot-com can be found online at http://www.economy.com.