Chapter 13 Cram Downs Of First Mortgages On Investment Real Estate

Chapter 13 debtors can cram-down mortgages on investment property to the amount of the property’s fair market value. People considering Chapter 13 to remedy upside down investment properties often ask how the cram-down works. Their questions cover issues such as when the cram down is final, does Chapter 13 affect their interest rate, and how does Chapter 13 cram-down deal with arrearage of past due payment on the investment property mortgage.

Here are some general answers to these common cram-down questions. Cram down differs from stripping a second mortgage on a primary residence. A second mortgage strip is final and permanent  at the end of the Chapter 13 plan. An investment mortgage cram down is temporary. Our courts will cram down an investment mortgage for two years during which time the debtor is expected to refinance or pay off the mortgage at the cram down value. The two year time limit can be extended for reasonable grounds such as, for example, time required to complete loan applications or closings.

A debtor may propose a reduction of interest rates to current market rates. The rate will be reduced unless the lender or trustee objections.  Courts will often cram down the interest together with the principal balance, and plan payments will reflect reduced interest and principal until the loan is refinanced. Arrearage amounts will be added to principal and crammed down.

The cram down of investment property is designed to give the debtor time to refinance the property at market value. Unlike the strip of a second mortgage on a debtor’s primary residence, the cram down will not permit the debtor to keep the investment over the long term with a reduced mortgage in anticipation of long term appreciation.