Legislation to give bankruptcy judges the power to reduce home mortgage debt–by “cramming down” the principal–doesn’t appear to have enough votes and will be stripped out of a broader housing bill in the Senate.I wouldn't mind if cram-downs became law for future mortgage contracts, but politicians shouldn't be arbitrarily changing the terms of existing contracts. In the long run, government meddling is harmful to the economy.
The cram-down effort is a major plank of President Barack Obama’s housing rescue, which also offers financial incentives to mortgage servicers to modify loans and allows some homeowners with little to no equity to refinance. ...
Monday, Dow Jones reported that the Senate will instead vote on the cram-down legislation as an amendment to the rescue bill, with all Republicans opposing the provision together with at least a couple of Democrats.
Elizabeth Warren, who heads a watchdog panel for the Troubled Assets Relief Program, told a financial regulation forum on Monday that failure to include the measure would blunt the Obama administration’s housing recovery efforts.
Wednesday, April 29, 2009
Mortgage cram-downs unlikely to be part of homeowner bailout
Good news from the U.S. Senate:
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"In the long run, government meddling is harmful to the economy."
ReplyDeleteSo you're saying that deregulation is the way to go? The magic power of the market knows best?
I don't know if you've noticed, but other things besides "government meddling" can be really harmful to the economy.
This idea of mortgage "cram-downs" is the most preposterous and egregious example of government intrusion into the real estate market yet proposed, and I hope that the Senate has the sense to quash it.
ReplyDeleteThe only more ridiculously offensive thing that I can think of (so I guess this is a prediction) is for the government to reset everyone's credit rating to 800 as of (insert date). Any guesses on how long it'll take for that to appear "on the table"? I'm gonna go with 18 months.
What the hell is it that is so horrible about cramdowns? I don't even understand why banks oppose it. So a homeowner would be allowed to ruin their credit by going into bankruptcy and then go in front of a judge who would establish some kind of payment plan.
ReplyDeleteHow is that worse than people walking away from their house and mortgage?
miguel said...
ReplyDelete"What the hell is it that is so horrible about cramdowns? I don't even understand why banks oppose it. So a homeowner would be allowed to ruin their credit by going into bankruptcy and then go in front of a judge who would establish some kind of payment plan."That's not a cram-down. A cram-down is when the judge changes the amount that the person owes. Let's say I borrow $100,000 from you and use my house as collateral. If I don't pay you, you get my house. A cram-down occurs when a judge says, "You know, Miguel, James will lose his house if he doesn't pay you the money he owes you. To keep him from losing his house, I'm going to change the amount he owes you. Instead of owing you the $100,000 that you lent him, I have decided that he only owes you $60,000."
miguel said...
ReplyDelete"So you're saying that deregulation is the way to go?"
No. Regulation is setting the rules of the game. Meddling is changing the rules willy-nilly in the middle of the game.
The problem is that the alternative to a cramdown is oftentimes foreclosure. From the standpoint of banks, both of these possibilities mean that they lose money - it is just a question of how much and when.
ReplyDeleteThe problem with cramdowns is that you essentially throw out centuries of contract law and make the enforcment of contracts subject to the whims of poilitical pressure. Throw out contract law, allow the government to rewrite private contracts at any time, and you've just turned the US into a banana republic.
ReplyDeleteAll that cramdowns are is giving the ability to bankruptcy judges to restructure mortgage debt just like they can with all other debt. Businesses are allowed to do it all the time, why would allowing individuals to do it be "throwing out centuries of contract law"? Bankruptcy is centuries old law too.
ReplyDeleteYou're allowing the government to rewrite contracts w/o declaring bankruptcy. You're forcing lenders to take losses w/o borrowers bearing their costs. You're introducing arbitrary politics into the contract system. Government is pressuring private institutions into behaving in a way they may not normally behave.
ReplyDeleteBusinesses are NOT allowed to restructure debt "all the time". Businesses that can't restructure debt go out of business. And restructuring debt does not mean that the lender is going to take a loss. Cramdowns are MORE than just restructuring debt.
Cramdowns make loans that happen later more expensive for the borrower.
My point was that when businesses declare bankruptcy the court is allowed to do anything it wants with regard to ALL it's debt, there isn't some special exception for the business's "primary residence", they can have a brand new mortgage on an office building or a factory that can be changed to pennies on the dollar or even completely thrown out. The judge makes a case by case judgment on how to restructure all the debt that is in the best interest of all parties.
ReplyDeleteThe anti-cramdown provision for individual's primary residences has only been in the bankruptcy code since the 1970s. While the debtor's plan for most other debt-laden assets can require the creditor to accept the present value (at the time of the bankruptcy petition) of the asset to determine the upper-end of the debtor's new obligation, for mortgages on primary residences this isn't permitted. When they made their pitch for preferential treatment in the 1970s, the mortgage industry argued that a cramdown provision would hinder credit in the real estate market. That might be true but easy credit is what caused this whole mess we're in now, by allowing cramdowns banks will have to be more careful with the risk their taking when making a loan.
miguel said...
ReplyDelete"My point was that when businesses declare bankruptcy the court is allowed to do anything it wants with regard to ALL it's debt, ... The judge makes a case by case judgment on how to restructure all the debt that is in the best interest of all parties."
You're talking about UNCOLLATERALIZED DEBT. When a company issues bonds, there's no collateral to back it up. When there's collateral to back up a debt, the collateral goes to the lender if the debtor doesn't pay. That's the whole freakin' point of collateral!
You seem to want borrowers to be able to use their home as collateral, but not have the bank be able to take possession of the collateral if the borrower can't pay up. That defeats the whole point of collateral.
If mortgage cram-downs become legal, the cost of borrowing will go up because the bank will have to take on greater risk with each mortgage. For renters like us, who hope to buy a home in the future, this will raise our cost of getting a mortgage.
"From the standpoint of banks, both of these possibilities mean that they lose money - it is just a question of how much and when."
ReplyDelete- Ah, but the cramdown legislation would take away from the banks the decision process of whether to restructure a debt or not. If a banks wants, it can make changes to an existing loan to help a 'homeowner'. This is already being done and as recent news reports have pointed out, many of those getting restructured mortgages are defaulting anyway. That might explain why banks are taking houses back from borrowers even though the current market sucks. Better to get somthing from the house than nothing from the original borrower...
Oh, and surely permitting cramdowns will just cause more problems for the housing market as other decide to atop paying to take advantage of the process...
This whole discussion is moot since the senate voted with the banksters yesterdays and voted against residential cramdowns. But, James, you are wrong about business bankruptcy, judges are allowed to cramdown collateralized debt. In fact it just happened yesterday with Chrysler. The reason they went into bankruptcy was to force SECURED creditors to accept new terms, aka cramdowns.
ReplyDeletemiguel,
ReplyDeleteYou're wasting your breath. Trying to hit these tea-bagger types with the clue-stick is like playing whack-a-mole.
Although a loan does not start out as income to the borrower, it becomes income to the borrower if the borrower is discharged of indebtedness.
ReplyDelete