Cram downs were outlawed in 1993 but before that;
… the judge would reduce the balance of the secured claim to the current market value of the house, turning the remaining balance of the mortgage into an unsecured claim (which would receive the same proportionate payout as other unsecured debts included in the bankruptcy petition).
Calculated Risk believes that allowing bankruptcy judges to cram down mortgage modifications on lenders would encourage banks to make wiser mortgage lending decisions.
That’s probably right.
And the elimination of cram downs in 1993 probably reflected the growing political influence of the banks at that time and their growing ability to shape laws the way they wanted.
Allowing bankruptcy judges the ability to cram down mortgages seems pretty tame to me now.
On a related subject, check out the real world bankruptcy experience of russ in the comments in this post, “Can bankruptcy be better than foreclosure for some people?”