Cram down
Encyclopedia
A cram down or cramdown is the involuntary imposition by a court of a reorganization plan over the objection of some classes of creditors.
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 mortgage
s 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
.
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 obligation
s 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.
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.
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
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
law, bankruptcy courts are not allowed to perform cram downs (i.e., reduce the principal amount or change the interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
or other terms) on creditors who hold loans secured by mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
s on the debtor's primary residences. As a potential solution to the subprime mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
, 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
Emergency Economic Stabilization Act of 2008
The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 The Emergency Economic Stabilization Act of 2008 (Division A of , commonly referred to as a bailout of the U.S. financial system, is a law enacted in response to the subprime mortgage crisis...
.
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 obligation
Collateralized debt obligation
Collateralized debt obligations are a type of structured asset-backed security with multiple "tranches" that are issued by special purpose entities and collateralized by debt obligations including bonds and loans. Each tranche offers a varying degree of risk and return so as to meet investor demand...
s 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 (debtDebt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
or equity
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
) 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.