Cram down

Cram down

A cram down or cramdown is the involuntary imposition by a court of a reorganization plan over the objection of some classes of creditors.[1]

Contents

Home mortgage loans

While typically used in a corporate context, the phrase has gained currency in a personal context the financial crisis of 2007-2009.

Under current United States law, bankruptcy courts are not allowed to perform cram downs (i.e., reduce the principal amount or change the interest rate or other terms) on creditors who hold loans secured by mortgages on the debtor's primary residences. As a potential solution to the subprime mortgage crisis, legislators and consumer advocates have advanced a proposal to allow cram downs on these loans, and legislation to that effect was introduced for potential inclusion in the Emergency Economic Stabilization Act of 2008.[2]

However, the financial industry strongly voiced opposition to such a measure, claiming that it would create additional uncertainty as to the value of mortgage loans (and by extension, the collateralized debt obligations into which they are bundled). While the provision ultimately was not included in the bill passed into law, the concept still has advocates and new legislation allowing for first-mortgage cram downs may appear in the future.

Informal use

The term (sometimes used in the phrase cram-down deal) has also gained currency to denote informally any transaction where existing investors (debt or equity) are forced by circumstance to accept an unappealing transaction, such as an expensive financing, a debt transaction that subordinates them, a dilutive equity raising, or an acquisition at an unappealingly low price.[3][4]

References

  1. ^ Definition at Bloomberg Financial Glossary
  2. ^ Siegel Bernard, Tara (September 28, 2008), "A Bill Encouraging to Distressed Homeowners, but Its Reach Is Unclear", The New York Times, http://www.nytimes.com/2008/09/29/business/yourmoney/29consumer.html 
  3. ^ Definition at Bloomberg Financial Glossary
  4. ^ Stracher, Cameron (December 9, 2001), "The Year in Ideas: A to Z; The Cram-Down", The New York Times, http://query.nytimes.com/gst/fullpage.html?res=9F02E4DF143CF93AA35751C1A9679C8B63 

Further reading


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