In this article, JP Morgan Chase analysts admitted that the proposed bankruptcy legislation would stabilize home values through decreased foreclosures.
However, the bill may be “a necessary evil,” JPMorgan Securities analysts said, and others agreed. Allowing bankruptcy cram-downs would force servicers to use principal forgiveness with loan modifications. “In the long run, cram-downs can help stabilize home prices through reducing distressed sales,” the analysts said.
Indeed, while redefaults remain high – a generic 25% payment reduction results in a 50% redefault rate – a 25% balance reduction, which is the type of modification a cram-down would accomplish, makes for a lower 30% redefault rate, according to Merrill Lynch data.
This may ultimately be a better alternative for bond holders as compared with the growing number of defaults and foreclosures, which is where the trend line is going, Telpner said. He pointed out that these modifications could stabilize assets in the pool even if investors are getting paid less on the dollar. “For some ABS pools, cram-downs may provide greater recovery because they serve as an alternative to writing off an increasingly large portion of the pool,” he said.
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