Cram down

Under current United States law, bankruptcy courts are not allowed to perform cramdowns (i.e., reduce the principal amount or change the interest rate or other terms) on creditors who hold loans secured by mortgages on debtors' primary residences.

At the time, Congress was confronted with brutal stagflation in which economic stagnation was combined with sky-high inflation and interest rates, which were severely frustrating the United States' long-term federal public policy of promoting homeownership (which goes back to the National Housing Act of 1934).

As a result, the home lending industry went back to Congress, which responded by extending the cramdown restriction for loans secured by primary residences to Chapter 11 with the Bankruptcy Reform Act of 1994.

In addition, like in the late 1970s, the financial industry had powerful political leverage on its side: the risk that revoking the cramdown restriction would result in higher interest rates on home loans.

As few politicians wanted to be blamed by Wall Street for making homes unaffordable or causing even more bank failures or a second Great Depression, the proposals for revoking the prevention of cramdowns on loans secured by primary residences never found much traction in Congress.