Froze: Bankruptcy law Change You Can Beleive In

[Okla-homey]

Okay, here's the scoop.

Currently, if you file bankruptcy (either Ch. 7 or Ch. 11), you get the benefit of the bankruptcy judge lookig at all your bills and notes, and deciding how much you owe. IOW, if you owe Joe's Thingamabob Store $20K, hizzoner has the authority to say <poof>, "you now owe Joe's $1.37"

However, said bankruptcy court poofery is not allowed under current US law as to mortgages. IOW, if you owe $100K on your house note, that's it. Hizzoner must accept it. That is the way it has been for infinity because to do otherwise would tighten the mortgage market and drive mortgage interest up because lenders would no longer have a decent shot at covering themselves at the Sheriffs Sale following the foreclosure.

Enter the changemeisters. My sources tell me there is a move afoot in the Congress to make a substantive change to the US Bankruptcy Code to give bankruptcy judges the authority to deduct from mortgage principal, just like they can on other debt. That means more people will be able to keep their houses who have defaulted on mortgages because they'll owe less, or in some cases, won't owe a dime on the mortgage when the judge is through.

If that happens, watch mortgage interest on new home loans go blasto and lots of private mortgage lenders choosing another line of business. And that my Sooner brethren and sisteren, would hit the American middle class right in the kaneekies.

That is all.

[Jerk]

"I won't have to worry about paying my mortgage..."

[Frozen Sooner]

1. You've got an inaccuracy in there. BK judges CAN cram mortgage debt down. They cannot do so only on primary residences-an inequity in the bankruptcy code.

2. BFD. As I understand it, cramdowns adjust the mortgage to fair market value of the collateral. The lender would generally get less than that in a foreclosure sale to begin with. The only option the BK judge has now is "Either pay the full mortgage or give the property back." Mortgage lenders-Citigroup in particular-WANT Durbin's bill to pass.

3. You see cramdowns in 13s much more than you do 7s, in my experience.

4. If you're talking about Durbin's bill, it specifically does not apply to Chapter 11.

[Penguin]

cramdown

[Frozen Sooner]

Yeah, I like saying it too.

[Okla-homey]

1. You've got an inaccuracy in there. BK judges CAN cram mortgage debt down. They cannot do so only on primary residences-an inequity in the bankruptcy code.

2. BFD. As I understand it, cramdowns adjust the mortgage to fair market value of the collateral. The lender would generally get less than that in a foreclosure sale to begin with. The only option the BK judge has now is "Either pay the full mortgage or give the property back." Mortgage lenders-Citigroup in particular-WANT Durbin's bill to pass.

3. You see cramdowns in 13s much more than you do 7s, in my experience.

4. If you're talking about Durbin's bill, it specifically does not apply to Chapter 11.

My concern regards a change to the Code that would give a bankruptcy court the authority to tell mortgagee(s) the paper they now hold on a bankruptcy petitioner's primary residence is worthless. I don't consider the court's lack of authority to do so under current law an "inequity in the bankruptcy code." Might as well eliminate preference for secured creditors too.

[SoonerAtKU]

Call me crazy, and I'm certainly no mortgage specialist or even a banker, but wouldn't a lender prefer to keep some value on the mortgage rather than go through the expense and difficulty of a foreclosure? Not to mention Froze's point about getting less than market value for the property upon sale after foreclosure? Of course, this is predicated on the court's decision to value the mortgage properly and not write off the debt entirely.

[Frozen Sooner]

My concern regards a change to the Code that would give a bankruptcy court the authority to tell mortgagee(s) the paper they now hold on a bankruptcy petitioner's primary residence is worthless. I don't consider the court's lack of authority to do so under current law an "inequity in the bankruptcy code." Might as well eliminate preference for secured creditors too.

That's not how cramdowns work. Again-the debt is adjusted to the amount of the secured claim. You're misrepresenting this process rather badly.

[Frozen Sooner]

Let me explain how cramdown works, by the way. Keep in mind that the court has the authority to do this for any other secured claim in the world OTHER than that against a primary residence.

Kelly and Kameron purchase a home in Kerrville valued at $300,000 and take out a mortgage at $270,000.

Two years later, the real estate market in Kerrville drops precipitously. Simultaneously, Kameron contracts a mysterious illness and is unable to work. Faced with mounting legal bills, the Ks take out a second mortgage based on the tax-assessed value of their home for $30,000.

The next year, after the medical bills have continued to mount, the K's file bankruptcy. They've attempted to modify their first mortgage (as required under the Durbin bill) but the lender has refused to negotiate, demanding payment in full.

During the bankruptcy hearing, it is determined that the K's house is worth 260k vice the 300k they paid for it. The judge reviews the extant debt and modifies the first mortgage (which they've paid very little principal on) to $260k and lowers the payments to a 40-year repayment plan (the maximum allowable under the Durbin bill.) The amount of the first mortgage that was over $260k and the full amount of the second are treated as unsecured creditors-meaning they're probably getting nothing, which is about exactly what they'd get (minus foreclosure costs and auction discount) had the property been foreclosed. The only difference is that the Ks now stay in the house.

The bankruptcy judge cannot just go *poof* the mortgage debt does not exist except in the rare case where the property is actually worthless. They CAN make seconds and thirds go away if the first mortgage is more than the fair market value of the house, but again-in reality, if you're in second position on a house that's worth less than the first, you're an unsecured creditor whether you have a piece of paper saying "Deed of Trust" or not.

[Frozen Sooner]

Call me crazy, and I'm certainly no mortgage specialist or even a banker, but wouldn't a lender prefer to keep some value on the mortgage rather than go through the expense and difficulty of a foreclosure? Not to mention Froze's point about getting less than market value for the property upon sale after foreclosure? Of course, this is predicated on the court's decision to value the mortgage properly and not write off the debt entirely.

The court cannot just write the debt off completely unless the property itself is worthless.

Under the Durbin bill the court must determine the amount of the secured claim based on the value of the underlying collateral.

[Ton Loc]

Let me explain how cramdown works, by the way. Keep in mind that the court has the authority to do this for any other secured claim in the world OTHER than that against a primary residence.

cont....

An excellent description of cramdown. :D

It is apparent that a lot of people are getting the wrong information about cramdown and this bill. Every blog and forum I look at has the basic explanation at first and then the 1000's various comments below the story skew and stretch the information trying to "explain" it better into something similar to what okla-homey has posted.

Not anyone's fault, what with all the crap info on the internet, who do you trust?

Two thumbs up to cramdown.

[Frozen Sooner]

Heh. Thanks. I'm actually involved in some litigation (as the secured creditor) involving a cramdown on farm property right now-which is how I had opportunity to research it a bit. The Farm Bureau tried to get us crammed down, but it turns out we're actually in first position ahead of them as they thought we had suborned and we hadn't. :D

To clarify: my family is the creditor.

[JohnnyMack]

cramdown.

[Frozen Sooner]

Fun to say, isn't it?

[SoonerAtKU]

crrrrrrrrrrramdownnnn

hell yes it is.

[Getem]

I got yer cramdown right here

http://www.burningworkshop.com/folding_socks/folding_socks_041.jpg

[Oldnslo]

Kameron contracts a mysterious illness

Krabs?





lemme try it:


cramdown!



heh.

[Frozen Sooner]

I know, right?

Say it slow and it's ALSO fun!

Crrrrrraaaaammmmmdooowwwwwwwwwwn.

[Scott D]

Homey needs to quit getting his information from the Air Force Intelligence Department.

[Okla-homey]

Homey needs to quit getting his information from the Air Force Intelligence Department.

Actually, my source was a luncheon attended by several folks who are in the private mortgage business (who loan their own cash) to residential mortgagors and who are planning on bailing on such investment if the Bankruptcy Code changes.

[Scott D]

so in other words, your sources are the kind of leeches who created the problem in the first place...gotcha.

[Okla-homey]

so in other words, your sources are the kind of leeches who created the problem in the first place...gotcha.

If a "leech" is a person who lends another person who lacks the funds to pay cash for a home the money to buy a home, for which the lender realizes a reasonable profit in the form of interest on said loan, yeah, they're "leeches."

What do you call grocers who have the gall to make people pay money for food items? "bloodsuckers?"

You people kill me. srsly.

[Frozen Sooner]

I'm on Homey's side on the individual investor type mortgagee. They didn't cause the problems in the mortgage market-they were using their own funds for this instead of using CMOs. Since they're generally lending to some pretty skanky borrowers, they're charging a higher rate of interest (which is only fair.)

Where Homey and I disagree is in that I don't think they deserve to be treated differently than any other secured creditor in a bankruptcy.

[Tulsa_Fireman]

Froggie went a' courtin' an' he did right...

pC-pC-Cccccc... Cramdown.

*THWAAAAAANG!*

Lost another strang!

[Scott D]

If a "leech" is a person who lends another person who lacks the funds to pay cash for a home the money to buy a home, for which the lender realizes a reasonable profit in the form of interest on said loan, yeah, they're "leeches."

What do you call grocers who have the gall to make people pay money for food items? "bloodsuckers?"

You people kill me. srsly.

pretty sure if you lend money to someone who can't pay it back, then cry foul about it...it should classify you as well....stupid. srsly.

[SoonerTerry]

tebow asked to see my KRMDWN

[Penguin]

Time for a Boomer Sooner Cramdown!

[Okla-homey]

Where Homey and I disagree is in that I don't think they deserve to be treated differently than any other secured creditor in a bankruptcy.

Here's why I beleive they should. By way of an illustration.

Homeowners insurance policies, like any insurance contract, generally list several coverage exceptions. The one that most people know without even bothering to read the policy, is the one that applies if a policyholder is found to have deliberately burned his home. In those cases, the policyholder gets zip.

However, throughout the US (insurance regulation is a state law dealio, not a federal dealio like bankruptcy) even if the policyholder is determined to have burned down his own crib, the insurance company must pay the mortgagee, who is usually listed as an additional insured on the policy, the actual cash value of the house at the time of the fire.

The reason for that, is the broad public policy favoring the protection of mortgagees in order to encourage people and institutions to join and remain in the mortgage lending biz. Please also note, secured creditors on a car or boat note are generally not similarly protected. IOW, if you torch your own ride, you get zip from your insurer, and the lender gets zip too.

All that to say, mortgagees feel, and I agree, they should continue to be afforded the broad protections under the US Bankruptcy Code they have always enjoyed as secured creditors on primary residences, in order to encourage people and institutions to be in the home loan business and therefore make home ownership possible for the maximum number of folks. Particularly since that mortgage is generally the biggest loan most folks will ever need.

Bottomline: A change in the law to give the bankruptcy court the authority to deduct from the mortgage principal on primary residences will have a chilling effect on people and institution's willingness to lend money for purchase of primary residences. It would also encourage more folks to be deadbeats, default on their mortgages, and run to bankruptcy court in order to keep their house.

[Okla-homey]

I know, right?

Say it slow and it's ALSO fun!

Crrrrrraaaaammmmmdooowwwwwwwwwwn.

Amidst all this love for the cramdown, I must put forth the downside. What is the effect on the market value of homes in the immediate area of any home crammed down? Hmmm?

[BlondeSoonerGirl]

:les: OMGWTFKRMDWN!!!

[royalfan5]

As an aside, when Chapter 12 bankruptcy for Family Farmers during the 1980's was instituted, cramdowns on the farmland on which the price had cratered where a prime feature, as many farmers who where otherwise solvent now owed far more than the land was valued at as the speculators had rushed out thus making lenders nervous and creating a cycle of foreclosures and failures that only served to further the problem.

Also, cramdown.

[Frozen Sooner]

Here's why I beleive they should. By way of an illustration.

Homeowners insurance policies, like any insurance contract, generally list several coverage exceptions. The one that most people know without even bothering to read the policy, is the one that applies if a policyholder is found to have deliberately burned his home. In those cases, the policyholder gets zip.

However, throughout the US (insurance regulation is a state law dealio, not a federal dealio like bankruptcy) even if the policyholder is determined to have burned down his own crib, the insurance company must pay the mortgagee, who is usually listed as an additional insured on the policy, the actual cash value of the house at the time of the fire.

The reason for that, is the broad public policy favoring the protection of mortgagees in order to encourage people and institutions to join and remain in the mortgage lending biz. Please also note, secured creditors on a car or boat note are generally not similarly protected. IOW, if you torch your own ride, you get zip from your insurer, and the lender gets zip too.

All that to say, mortgagees feel, and I agree, they should continue to be afforded the broad protections under the US Bankruptcy Code they have always enjoyed as secured creditors on primary residences, in order to encourage people and institutions to be in the home loan business and therefore make home ownership possible for the maximum number of folks. Particularly since that mortgage is generally the biggest loan most folks will ever need.

Bottomline: A change in the law to give the bankruptcy court the authority to deduct from the mortgage principal on primary residences will have a chilling effect on people and institution's willingness to lend money for purchase of primary residences. It would also encourage more folks to be deadbeats, default on their mortgages, and run to bankruptcy court in order to keep their house.

Apples and oranges, my friend.

Protection of a mortgagee from the destruction of their collateral by an intentional act of the insured is not the same as protection of a mortgagee from making a bad investment.

Not only that, but as you well know, the insurance company in your above example would only pay the lesser of the policy limit or the actual cash value of the property-NOT the balance of the mortgage. In other words, about what a bankruptcy court would allow the mortgagee to recover after a cramdown. Not really a good example for your side there.

Also: Do the insurance companies not have the right to recover against their insured if they end up paying for an intentional act of the insured?

[Frozen Sooner]

Amidst all this love for the cramdown, I must put forth the downside. What is the effect on the market value of homes in the immediate area of any home crammed down? Hmmm?

Homey, with all due respect, this question doesn't make any sense at all.

The court recognizing fair market value of a property will have no effect on the value of surrounding property. How could it? The fair market value is based on what similar property in the immediate area is going for. You're reversing cause and effect.

In fact, foreclosure has a deleterious effect on surrounding property values. People tend to not like buying property in neighborhoods with empty homes, and the foreclosure sale is going to typically be at a discount-screwing up everyone's comps.

[jkjsooner]

Let me explain how cramdown works, by the way. Keep in mind that the court has the authority to do this for any other secured claim in the world OTHER than that against a primary residence.

Kelly and Kameron purchase a home in Kerrville valued at $300,000 and take out a mortgage at $270,000.

Two years later, the real estate market in Kerrville drops precipitously. Kelly and Kameron were never able to actually pay for a $300,000 house. Once their teaser rate expired and since they can no longer refinance, they found themselves in a position where they could no longer pay their bill...

Adjusted your hypothetical with more contemporary scenario.

[jkjsooner]

This is all going to end so badly. First we have an idealogue who refused to properly regulate the mortgage industry and now we have idealogues who want to fix every problem w/o regards to unintended consequences.


Maybe it's just me but I want to punish these people who priced me out of the real estate market. It's ironic that they are the ones who are irresponsible yet forcing them into renting (something I am forced to do lest I'm willing to make a stupid decision) is somehow considered cruel.

[BigRedJed]

CRAMDOWN!!

[Viking Kitten]

:les: CRAMD-OWNED!!

[Penguin]

http://www.stus.com/images/products/blg5961.gif

[Okla-homey]

see below.:D


Apples and oranges, my friend.

Protection of a mortgagee from the destruction of their collateral by an intentional act of the insured is not the same as protection of a mortgagee from making a bad investment.

I don't agree. In either case, someone is wagering on a human being's ability and/or willingness to do what he says he'll do.

Not only that, but as you well know, the insurance company in your above example would only pay the lesser of the policy limit or the actual cash value of the property-NOT the balance of the mortgage. In other words, about what a bankruptcy court would allow the mortgagee to recover after a cramdown. Not really a good example for your side there.

Not so mon frer. People buy homeowners policies based on their loan amount, which, in the case of most of the people who torch their own abodes, is pretty close to the sale price, not the so-called actual cash value of the place. Mortgagees insist on it and they can't get through closing otherwise.

Now, lets explore how ACV on a house might actually be less than the appraised value/sales price. Blame the appraiser. See, in my experience, your so-called licensed appraisers invariably appraise the property for the contract price. Why would they do that, especially since they are 'sposed to be an objective third-party evaluator? Simple. They get their gigs from real estate agents and closing companies. Would an appraiser ever get another call if he torpedoed a closing because he appraised a house for less than what the buyer agreed to pay? Hayell No!

Thus, when a little, or no money down mortgagor starts having trouble making ends meet, and decides to torch the joint, the mortagee makes out okay whether the bum gets busted for arson or not. Why? Because in Insurance World, ACV = sale price. Trust me on that.

Therefore, if a broke-a$$ homeowner with latent arsonist tendencies has built up a little equity in his house, he is often tempted to burn it, and pocket the difference.

Also: Do the insurance companies not have the right to recover against their insured if they end up paying for an intentional act of the insured?
Of course they do. But, like is sadly the case as to defendants generally, people who are desperate enough to torch their own casas are invariably judgement-proof because they are already broke. You can't get blood out of a turnip.

So, given all the above, if America wants people to be able to arrange financing from willing lenders enroute to the dream of home ownership, it better lighten-up on the cramp downage and leave the damn Bankruptcy Code alone.

[Frozen Sooner]

Not so mon frer. People buy homeowners policies based on their loan amount, which, in the case of most of the people who torch their own abodes, is pretty close to the sale price, not the so-called actual cash value of the place. Mortgagees insist on it and they can't get through closing otherwise.

Regardless of what the purchase price of the home was and what the policy limit is, the most an unendorsed homeowner's policy will pay is ACV. If the home has depreciated-something that is assumed in a cramdown case-then ACV is going to be less than the purchase price. Therefore, it's very conceivable that even if the policy limit is the purchase price of the home, the payout is still going to be less.

[BigRedJed]

Language...

td-KKmcYtrM

[Okla-homey]

Regardless of what the purchase price of the home was and what the policy limit is, the most an unendorsed homeowner's policy will pay is ACV. If the home has depreciated-something that is assumed in a cramdown case-then ACV is going to be less than the purchase price. Therefore, it's very conceivable that even if the policy limit is the purchase price of the home, the payout is still going to be less.

If an insurance company tried to pay less than the sale price/policy limits on a total loss fire claim, you can bet that policyholder would hire a lawyer to sue the insurance company for bad faith. Here in Okrahoma, insurance bad faith is a tort claim. Insurance bad faith lawsuits are the bane of the insurance industry because punitive damages and attorneys fees and costs are available for the plaintiff/insured if he wins. That, and the litigation costs, even if the insurance company wins, are prohibitive.

Okie juries aren't generally fond of insurance companies that pocket premiums based on a given policy limit then refuse to offer the insured those limits on a total loss housefire based on some smoke-and-mirrors ACV calculation that is all rigged from jump street anyway.

Therefore, its generally easier and cheaper to pay limits, even if ACV is less than the policy limits and that is precisely what most insurance defense firms advise companies to do...unless its really heinous and a jury could be guarenteed to see a guy paid absurdly more than the place was worth. Which is no small feat in the vast majority of cases.

[VeeJay]

:les: OMGWTFKRMDWN!!!

Cramdown Pwn3d

[Frozen Sooner]

If an insurance company tried to pay less than the sale price/policy limits on a total loss fire claim, you can bet that policyholder would hire a lawyer to sue the insurance company for bad faith. Here in Okrahoma, insurance bad faith is a tort claim. Insurance bad faith lawsuits are the bane of the insurance industry because punitive damages and attorneys fees and costs are available for the plaintiff/insured if he wins. That, and the litigation costs, even if the insurance company wins, are prohibitive.

Okie juries aren't generally fond of insurance companies that pocket premiums based on a given policy limit then refuse to offer the insured those limits on a total loss housefire based on some smoke-and-mirrors ACV calculation that is all rigged from jump street anyway.

Therefore, its generally easier and cheaper to pay limits, even if ACV is less than the policy limits and that is precisely what most insurance defense firms advise companies to do...unless its really heinous and a jury could be guarenteed to see a guy paid absurdly more than the place was worth. Which is no small feat in the vast majority of cases.
Nah, you're right. I was carried away with what the policy actually says vs. what happens in the real world.

Though I'd love to be a fly on the wall when the plaintiff's attorney attempts to bring a bad faith claim against an insurer on behalf of an arsenous client.

[Chuck Bao]

I am totally lost in this argument and I know nothing about US bankruptcy laws. So, of course, I'm going to butt in with a totally uninformed opinion.

I'd been told that personal bankrupcty allows one to retain one residence. It seems to me that that is already an important concession of the debt holders. To then merge the mortgage loan on that sole resident property with all of the other debt in a debt restructuring case would complicate the process considerably because the debt holders would have different degrees of access to redeemable assets.

Or, it wouldn't if the defaulted debt is primarily related only to the mortgage loan of the primary residence, which seems to be the predominate number of cases.

I can see that mortgage holders want this rule, so that they get a chance to negotiate and get some money and not be left as the last to settle on the eventual sale of the property in a very poor market. Okay, that may not work out so well for them, but it does give them a chance to negotiate something with the non-mortgage debt holders.

I'm not sure about the ramifications of the proposed changes and I'm certainly not getting the insurance part.

In my opinion, if the primary mortgage is the chief problem, then bringing it into the early step of debt re-negotiation is not a bad idea.

I'm not getting that it is bad for the mortgage industry.

Okay, what did I miss?

[Vaevictis]

Generally speaking, I don't see a problem with permitting the mortgage to be readjusted to the market value of the house.

Claiming it will make mortgages harder to get is not quite right; it may make mortgages more expensive as the lenders price this possibility in.

What I do see a problem with is (1) bankrupt individual getting the cramdown, and then (2) the property value appreciating and the individual reaping the benefits at the lender's expense.

I wouldn't mind seeing the mortgage holder being able to come back and get the cramdown'd mortgage value increased to the maximum to the original value plus any interest that should have been earned if the property appreciates.

[Frozen Sooner]

Vaevictus, here's an article posted by Adam Levitin, Associate Professor of Law at Georgetown specializing in bankruptcy and consumer credit law:


Cramdown and Future Mortgage Credit Costs: Evidence and Theory
posted by Adam Levitin

I've written extensively (see here, here, e.g.) on why permitting modification of mortgages in bankruptcy would generally not result in higher credit costs or less credit availability. As the debate over bankruptcy reform legislation to help struggling homeowners and stabilize our financial system moves to the fore, it's worth repeating some of the key points and making some new ones.

(1) The key comparison is bankruptcy modification versus foreclosure. Opponents of bankruptcy modification often misframe the issue, whether deliberately or ignorantly. It is not a question of bankruptcy losses versus no losses, but bankruptcy losses versus foreclosure losses. If bankruptcy losses are less than foreclosure losses, the market will not price against bankruptcy modification. This is an empirical question, and to date, my work with Joshua Goodman is the only evidence on it. Opponents of bankruptcy modification have only been able to respond with plain-out concocted numbers (e.g., the Mortgage Bankers Association) or insistence on applying economic theory that looks at the wrong question.

(2) Economic theory tells us that cramdown is unlikely to have much impact on mortgage credit costs going forward. The ability to cramdown a mortgage (reduce the secured debt to the value of the property) is essentially an option borrowers hold to protect themselves from negative equity. It is a costly option to exercise--it requires filing for bankruptcy, and that has serious costs and consequences. More importantly, though, cramdown is typically an out-of-the-money option. It is only in-the-money when (1) property values are falling enough that there's negative equity and (2) likely to remain depressed in the long-term. Long-term declining residential property values have been the historical exception. What this means is going forward there really isn't much for creditors to worry about with cramdown--homeowners can't exercise an out-of-the-money option.

Moreover, because the likelihood of the cramdown option being in the money is Instead, it is an option that is more likely to be valuable when default is imminent, at which point the loan is in the secondary market. So to the extent that the cramdown option does cost creditors, it is the secondary market, and the effects on credit availability and cost to homeowners would be diffused.

(3) Arguments about bankruptcy court capacity and bankruptcy transaction costs are made by people who have no experience with the actual bankruptcy system. A serious misconception about bankruptcy modification is the belief that the bankruptcy judge would decide how to rewrite the mortgage. That's not how bankruptcy works. The debtor (and debtor's counsel) would propose a repayment plan that includes a mortgage modification. The judge either confirms or denies the plan, depending on whether it meets the necessary statutory requirements. This means that bankruptcy judges can actually handle significant consumer bankruptcy case volume. If you want proof that the bankruptcy courts can handle a huge surge in filings, look at what happened in the fall of 2005, before BAPCPA went effective. The courts survived that flood of filings. Today the bankruptcy courts are better prepared; there are more bankruptcy judges (thank you BAPCPA) than in fall 2005. Nor would there be tremendous time and money lost in valuation disputes. After there are a handful of cases decided in a district, all the attorneys know what the likely outcomes would be in future cases and settle on valuations consensually. Court capacity and excessive transaction cost arguments are made by people who have never stepped foot into bankruptcy court.

(4) There's no other serious option on the table. Permitting bankruptcy modification of mortgages will not by itself solve the finance crisis. It will not stop all foreclosures. But it will help stop some uneconomic foreclosures, which benefits homeowners, investors, communities, and the financial system. And, more importantly, whatever imperfections bankruptcy modification has as a solution, it's the only real option on the table.

There is no other detailed legislative proposal. There are various economist pipedream proposals around, but even the best of them fail, either because they are politically unrealistic or because they are too rooted to a belief that the private market can solve problems with a tweak here and there. I believe that people and institutions respond to incentives, but market-based solutions haven't worked to date. How many times do we have to be burned by "market-based" solutions before we try something else? The unfortunate truth is that no one understands enough about various mortgage market players' incentives to properly align them. We can't follow all the trails of servicing contracts, insurance, reinsurance, credit derivatives, overhead, and litigation risk and know what incentives look like. Even if we did, it would take serious time for the market to correct itself and start doing large-scale loan modification. That's time that families don't have, and I don't think that anyone who is advocating a market-based solution is also pushing a foreclosure moratorium to allow the market to get its act together. Bankruptcy modification is the only game in town, and to pretend otherwise is disingenuous cover for opposing it in the name of "studying all the options."

As for the realization of gains-that's a good point. The Durbin bill only applies to Chapter 13 bankruptcy, so if the sale occurred before discharge it's possible that the creditor could then file an objection to the plan based on a realized gain in the property. After the plan...well, bankruptcy kind of sucks for creditors. There's really no way of getting around that.

[Vaevictis]

Right, but bankruptcy is supposed to suck a whole hell of a lot less for secured creditors.

By letting them irrevocably draw down the principle on a secured loan, you're essentially transferring all the upside to the bankrupt individual.

I would rather see the lender have a mechanism to recapture that. Maybe if you do a cramdown of X, the lender has the right to 50% of all gains up to 2X. That way, both parties have incentive to maximize the sale price upon the eventual sale.

[Frozen Sooner]

Right, but bankruptcy is supposed to suck a whole hell of a lot less for secured creditors.

Cramdown recognizes that loans on collateral without supporting value are unsecured to the amount that they've overlent.


By letting them irrevocably draw down the principle on a secured loan, you're essentially transferring all the upside to the bankrupt individual.

I would rather see the lender have a mechanism to recapture that. Maybe if you do a cramdown of X, the lender has the right to 50% of all gains up to 2X. That way, both parties have incentive to maximize the sale price upon the eventual sale.

Yeah, I get your point on that. I don't know, though-cramdown on other collateralized loans gets no such deal, even on non-residential real property.

[Frozen Sooner]

After doing some quick research, it appears that the final version of the Durbin bill will include some shared clawback. So there you go.

[Vaevictis]

Well hot diggity, I'm in.

[Vaevictis]

Cramdown recognizes that loans on collateral without supporting value are unsecured to the amount that they've overlent.

Essentially, the lender has purchased a call option with that overlending. It's an option that they massively overpaid for, but it's there.

Cramdown without clawback transfers the value of that call option to the bankrupt individual, and I don't see a good reason for it.

In any case, it's kind of moot since the bill includes it, but, I figured it might be worth discussing the reasoning.

[BigRedJed]

CLAWBACK!

[Okla-homey]

CLAWBACK!

good metal band name.

[I Am Right]

This was a good thread!

[BigRedJed]

I disagree.

[Viking Kitten]

http://img398.imageshack.us/img398/7093/normhead3vofc7.jpg (http://imageshack.us)

CRAWBACK!!

[BigRedJed]

OK, now it's a good thread.

[I Am Right]

Language...

td-KKmcYtrM

Was that Jerry Bomar?

[Curly Bill]

CLAWBACK!


Is this some kind of kinky sex thread? :confused:

[TUSooner]

As I licensed attorney, admitted to the federal bar, I want to get in on this

cramdown
oooh.
CRAMDOWN!
oh yeah.

CLAWBACK.
heh

Take my advice, please.

[Penguin]

Who would win in a wrasslin' match between Captain Cramdown and Commander Clawback?

[NYC Poke]

I just ran across this and this thread sprang to mind, for some reason.


On Language
Cramdown
by WILLIAM SAFIRE
Published: January 22, 2009

“Even the nickname for the legislation,” wrote Victoria McGrane in the Politico newspaper this month, “ — a cram down — sounds like trouble.” She described the bill being pushed by Senator Richard Durbin of Illinois, a pal of the president and a power in the Democratic Senate, as akin to a “political hand grenade being tossed into the economic stimulus negotiations.” A lobbyist for the nation’s mortgage bankers, a group that does not want to catch that grenade, agreed: “Cramdown is an impediment to passing a stimulus quickly.”

A hearty welcome to a new noun. Financial lingo can be colorful: bailout, with its image of passengers in a leaky vessel using tin cans to heave water out of the boat, was selected as the 2008 Word of the Year by the American Dialect Society. Haircut, snipping away at the value of investments, was given a rinse and blow-dry in this space recently. Stockbrokers watching any move upward in the indices hope it is not a dead-cat bounce, a macabre metaphor that distresses pet lovers. The political phrase lame duck began as a British description of bankrupt businessmen.

Which brings us to borrowers on the brink. The noun cramdown, back-formed from a verb phrase, was coined in 1668 by Lord Chaworth in a report on the papers of the Duke of Rutland: “I would advise you to eate your words, else Ile . . . crame them downe your throate with my sworde.” (We’ve dropped e a lot since then, but the fearsome metaphor suggesting indigestibility is still with us.) To cram down is “to stuff into an unwilling recipient,” much as Shakespeare earlier used the figure of speech in “The Tempest”: “You cram these words into mine eares, against the stomache of my sense.”

The vivid noun has long enlivened the language of bankruptcy law. I turned to Eugene Wedoff of Chicago, a U.S. bankruptcy judge, who unearthed a 1948 Yale Law Review article by De Forest Billyou (what a great name for a lawyer) about the revision in 1935 of the Bankruptcy Act of 1898 “by enactment of the ‘cram-down’ provision.” Also, a 1944 decision of the Second Circuit referred to “the so-called cram-down provisions of Section 77 of the Act.” (There it goes again — the need of the dignified to dissociate themselves from colorful language with the modifier “so-called.”)

“As these references indicate,” Wedoff notes, “cram down originally meant imposing on creditors any treatment of their claims they had not accepted. Today, many debtors might choose to ‘cramdown’ the mortgage when the value of the mortgage debt exceeds the value of the house.”

This year’s proposed legislation would allow bankruptcy judges to modify mortgage loans for homeowners facing foreclosure, in effect imposing the revision on the less-than-popular lenders, much as Chaworth said in 1668, though only with the force of law and not with a sworde.

A spokesman for Senator Durbin, uncomfortable with the phrase that has gripped financial writers, says that “the term is used poorly. It’s pejorative.” What terminology would be the Durbin choice? “The senator prefers judicial modification,” the spokesman said. That is not exactly a grabber of a description; if the bill becomes law, let’s see how the practice is referred to in headlines and online.


http://graphics8.nytimes.com/images/2009/01/25/magazine/25language_600.jpg

http://www.nytimes.com/2009/01/25/magazine/25wwln-safire-t.html?_r=1&ref=magazine

[Okla-homey]

See, I told you private mortgage lenders are freaking at the prospect of judicial modification of mortgage debt. In fact, that's how this thread began. Before donk apologists muddied the waters.;)