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U. S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
WASHINGTON, D. C. 20410-8000

June 4,1991
OFFICE OF THE ASSISTANT SECRETARY FOR
HOUSING-FEDERAL HOUSING COMMISSIONER
MORTGAGEE LETTER 91-27
     TO:  ALL APPROVED MORTGAGEES
     ATTENTION:  SERVICING MANAGERS (SINGLE FAMILY)
     SUBJECT:  Mortgage Cramdowns
 
       I.  DEPARTMENT POLICY REGARDING MORTGAGE "CRAMDOWNS"
 
           A.  Under a bankruptcy cramdown, a homeowner's debts are
               divided into secured and unsecured portions.  In the
               case of a home mortgage, the mortgage is divided into
               two "claims" -- a secured claim equal to the current
               appraised value of the property and an unsecured claim
               equal to the difference between the unpaid principal
               balance of the mortgage and the appraised value (which
               is combined with other unsecured debt, such as that for
               credit cards).  The bankruptcy judge then approves a
               plan for the payment of some of the unsecured debt over
               a period of three to five years.  (During this time,
               the homeowner continues to pay his or her full monthly
               mortgage payment.)
 
           B.  The actual discharge of the unsecured claim occurs
               only if the debtor successfully completes the approved
               repayment plan.  If the debtor defaults on the
               repayment plan or if the debtor's financial situation
               improves sufficiently, the mortgage holder may petition
               to have the original mortgage terms reinstated.  If the
               petition is granted, the cramdown will be voided,
               although other provisions associated with a normal
               bankruptcy may still apply.
 
           C.  After the successful completion of the bankruptcy
               action and the termination of the plan, the mortgagor
               remains liable only for the reduced portion of the debt
               which remains secured by the mortgage.  If, at this
               juncture, the mortgagor defaults and the mortgage
               (which has been reduced by the cramdown) is foreclosed,
               the mortgagee may choose to file a claim for FHA
               benefits after the foreclosure.
 
           D.  It is the Department's policy that an incoming claim
               which is complete, timely and follows all applicable
               procedures and criteria, will be paid based on the
 
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          unpaid principal balance that has been adjusted
          downward ("crammed down") by operation of law, with the
          customary additions and deductions that are part of the
          claims process.
 
      E.  Special instructions for filling out Part A of Form
          HUD-27011, "Single Family Application for Insurance
          Benefits".
 
          1.  When filing a claim for FHA benefits, mortgagees
              should enter the crammed down (reduced) amount of
              the secured portion of the loan in Block 15,
              "Original Mortgage Amount".
 
          2.  The amount entered in Block 17, "Unpaid loan
              balance as of date in block 8," cannot exceed the
              amount entered in Block 15.  In the case of a
              cramdown, the unpaid loan balance, also known as the
              UPB (unpaid principal balance) must be less than
              or, at most, equal to the crammed down secured
              amount resulting from the operation of the
              Bankruptcy Court.
 
          3.  The mortgagee filing the claim must indicate, in
              the section reserved for "Mortgagee's Comments,"
 
              a.  that a cramdown has occurred, and
 
              b.  other pertinent information, e.g., the amount
                  of the cramdown, the date it occurred, the
                  location of the Court which took this action,
                  and the Court's docket number, if available.
 
      F.  If the mortgage (secured) loan is paid off in full, at
          the crammed down figure, there can be no foreclosure,
          and hence, no claim can be filed for FHA benefits.
 
     Questions regarding claims in the context of cramdowns
should be directed to Single Family Loan Management at the local
HUD Office with jurisdiction over the mortgaged property at
issue.
 
                         Sincerely yours,
 
                         _________________________________________
                         Arthur J. Hill
                         Assistant Secretary for
                           Housing-Federal Housing Commissioner