“Cram down” home foreclosures
An eviction team removed the furniture from her foreclosed house on February 2, 2009 in Adams County, Colorado. (Photo by John Moore/Getty Images)
Congress is considering bills that would allow federal bankruptcy judges to amend home mortgages, changing the terms to prevent families from losing their homes to foreclosure.
Lobbyists for the nation’s largest financial institutions are on red alert; they’re waging an all-out campaign to keep Congress from enacting such a reform.
It should be noted that these are the same institutions whose recklessness and foolishness on the subject of mortgage lending significantly contributed to the nation’s current economic crisis.
They are dead wrong about bankruptcy reform, too.
There’s nothing novel or controversial about the procedure being considered by Congress. It is referred to as a bankruptcy judge’s “cram down” (or “strip down”) authority. Judges already use it to modify most kinds of secured debt in bankruptcy proceedings — including mortgage loans on vacation homes and multi-family investment properties.
The federal Bankruptcy Code gives some people experiencing serious financial troubles a chance to reduce debt — and hold onto some of their property — under court-approved repayment plans. The court has broad power to modify the terms of most kinds of debt, including by reducing — or “cramming down” — amounts owed. Debts may be reduced to the actual value of the collateral that secures it.
Say, for example, that someone seeking bankruptcy protection has borrowed $150,000 and has put up a $10,000 piece of family jewelry and a two-family investment property with a market value of $80,000 to secure the loan. The court could reduce the debt to the $90,000 value of the property. The debtor, meanwhile, would not have to sell the property so long as he or she abides by the terms of the repayment plan.
This is not the case now with home mortgage loans. Banks and other lending institutions have enormous influence over bankruptcy legislation. They made sure mortgage loans on a person’s primary residence are an exception to the “cram down” rule.
Now the nation faces home foreclosures of epidemic proportion. Mortgage lenders have unveiled all manner of voluntary relief programs for distressed homeowners — the “HOPE NOW” effort has received the most publicity. But these programs have been an unmitigated bust.
Some mortgage holders claim to be willing to renegotiate mortgage loans to keep families from losing their homes. But just a tiny fraction of legitimate candidates for relief have been helped. Banks argue that mortgage loans often have been repackaged and “tranched” so many times, it’s impossible to get the owners of mortgage-backed securities to sign off on the renegotiated loans.
Lending industry lobbyists, meanwhile, have enlisted the support of Republican members of Congress — most prominently in the U.S. Senate — to prevent the special treatment accorded mortgage lenders from being lifted.
Missouri Republican Sen. Christopher S. “Kit” Bond, for example, stood on the floor of the Senate less than a year ago advancing the lending industry line. He argued that allowing bankruptcy judges to cram down home mortgages would increase the cost of borrowing to all homeowners “by 1.5 to 2 percent.”
The argument is bogus. It has been debunked by a growing number of financial analysts. It is a scare tactic designed to derail a carefully crafted and much-needed consumer protection.
Bankruptcy reform will not cure the foreclosure crisis. But it could make a huge difference, bringing prompt relief to homeowners — not speculators — with legitimate prospects of repaying the value of their home.
But the financial services industry fights as hard to preserve its legal prerogatives as it does to keep billions of dollars in bonuses flowing. Indeed, thanks to the efforts of their lobbyists and political allies, the debate over bankruptcy reform appears to be delayed until later in the year, to prevent Republicans objections in the Senate from bottling up the stimulus bill.
Politicians are playing footsie with the financial services lobby — and the foreclosures mount.
Someone else takes the loss in these ‘cram downs’ Then we wonder why these lenders need a bailout or go out of business and lay off all their workers, and the unemployment rate goes up. Cram Down is not a solution, it is and act of revenge and the wrong people get hurt. Don’t do it
So, apparently the position of the PD editorial board is that personal responsibility is an obsolete notion. You indicate that home buyers who contributed to inflated property values by yielding to the temptation to purchase a large luxurious home well beyond their means should have the consequences of that poor choice mitigated by the courts. You infer they are child like victims of our evil capitalist system.
Meanwhile, a young couple who reluctantly selected something less than their dream home or ideal neighborhood to stay within their financial means shares the burdens of higher taxes, inflation, recession, and increased national debt because of the selfish actions of reckless buyers, lenders, and lawmakers.
The true victims are those who tried to do the right thing and who accept responsibility for their decisions. When our society removes personal accountability, we also destroy individual freedom.
But, treating adult citizens like helpless children is a sure-fire path to the editorial board’s vision of a Utopian nanny state. Right?
Mortgages with low interest rates and very long terms have been available because they are securitized by real estate which is relatively liquid and stable in value. This “reform” would make the securitization worthless, and can therefore only result in less attractive mortgage terms in the future. The long-term effect of that would be to further depress housing prices. Just the sort of economic thinking I’d expect from people who work for a company whose stock barely outperformed Bernie Madoff over the past year.
The cram down power should be limited to bankruptcy situations after someone files or is forced into bankruptcy. If contracts are subject to reset after the fact, they are worthless and lenders will seek other avenues for their capital making loans harder to get. If someone can prove they were victimized by a lender, they have the right to sue for relief. However, to say that just because some lenders were unscrupulous courts should have the power to invalidate all contracts. We are moving to socialism where a contract gives someone the right to change his mind later. Capital will seek a new home if that happens.
If they are loosing their homes because of no fault of their own then anything that can be done to help them should be done…. but if they got THEMSELVES into trouble buy being irresponsible, selfish and greedy then I say let them loose their homes. If you cant be bothered to create a budget or balance a checkbook then you deserve to loose everything.
These comments sing the same song that has been sung by the financial services industry as it drove itself off the cliff — by getting just about *everything* wrong.
They are wrong about this too.
I recommend to readers the piece from the Georgetown Law Center that is linked in the above editorial.
Please note its reference to the fact that, “under current law, debtors can modify mortgages on vacation homes, investor properties, and multifamily residences in which the owner occupies a units … as well as loans secured by yachts, jewelry, household appliances, furniture, vehicles …”
………….lots of blame to go around here……..folks that saw no problem with living paycheck-to-paycheck way beyond their means in mcmansions they could not afford, government and it’s foolish CRA forcing banks to make a lot of high risk loans, and the banks for not projecting (or believing) that the housing/morgage bubble would someday have a major problem.
Eddie - There are some fundamental differences you’re failing to mention. The most important one is this: Mortgage terms for your primary residence are significantly more favorable than for other real estate. Interest rates are lower, and so are down payment requirements. The difference has grown wider in the current crisis, and is likely to remain so for a long time.
While I appreciate your recommendation that your blog readers download and read an 86 page paper, I will confess to only skimming over it. There are some BIG problems with this paper. The author says that “Because lenders face smaller losses from bankruptcy modification than from foreclosure, the market is unlikely to price against bankruptcy modification.” But in fact, that is an assumption, not a fact. First of all, to the extent that the risk of bankruptcy modification is an additional risk and not merely a replacement for the risk of foreclosure, it could affect pricing. Furthermore, the failure to give primary residence mortgage lenders exemption from bankruptcy court modifications would mean that borrowers would no longer have to give preferential treatment to paying their mortgage. It also exposes lenders to substantial legal costs, as they will be forced to defend their interests in every case where a borrower declares bankruptcy. Finally, in a world where housing prices are declining, this shifts the risk for capital loss from the borrower to the lender.
That the study found that none of these things would have a significant impact on the terms of lending for primary residential mortgages is no more surprising than your recommendation of the study. If you want to see reality, phone a dozen banks and tell them you want to get a loan on a rental property. Then, compare the terms to what you can get on a residential mortgage. The difference is huge.
“These comments sing the same song that has been sung by the financial services industry as it drove itself off the cliff — by getting just about *everything* wrong”. - Eddie Roth
The rest of that analogy is that government provided the vehicle, consumers bought the gas, and the media painted over the road signs.
Unfortunately for the PD, most people recognize the fact your own worn out song is missing the bass line. For people, businesses, and markets choices have consequences; unless big government or nanny jumps in to clean up the mess and make it all better till next time.
How about this PD. What if we just have the Fed buy all of the houses and we can all have Govt. Housing? Since those of us that boughtlivedstayed within our means are going to get stuck with the tab anyway. Why don’t we all just walk away? The bottom cause here is greed at all levels and I’m sure you have some article showing the poor family that’s working 7 jobs just to get by to justify why we should do something. In the end you’re just rewarding bad (make the dumb) behavior. To quote Jim White from KMOX long ago…. “You can’t fix stupid” But I’m guessing you’re all for us paying for it.