FORECLOSURE PREVENTION PLAN.....

NEW -> Contingent Buyer Assistance Program
Um, we're talking cramdowns. There's no subsidy here. If, during the bankruptcy proceedings, the judge determines they can pay a mortgage at current prices, he resets the mortgage to that price. They're paying as much as anybody would. The remainder of the loan becomes unsecured and is paid off to the extent that the borrower is able, as determined by the judge. The bank (not the taxpayer) loses the excess - but that's the point and purpose of bankruptcy. Bankruptcy is for people who have genuinely borrowed too much, and FB's generally qualify.



If the borrower is not able to make a fair market-value payment for the house it gets foreclosed anyway (subject in some states to a homestead exemption). Latka couldn't keep his apartment.



I don't think anybody here is advocating a taxpayer bailout of FB's beyond pre-existing commitments to support certain kinds of lenders. To the extent that lender losses take down banks and pension funds, the government may have to step in through FDIC or PBGC to do bailouts, but we're stuck with those. If Max thinks we do have to do more, I'd be interested in seeing the details before launching the attacks. My impression from following these threads is that there is far less disagreement than the heat would suggest.
 
<p>A cramdown is a subsidy. The subsidy being that the lender didn't charge a high enough interest rate initially to cover the cramdown possibility. The subsidy that the mortgage investors are forced to pay when the govt rewrites the contracts they agreed to initially.</p>

<p>The proof of which, is that is if cramdown's became law, then ***poof*** the new interest rates and deposit requirements for future homebuyers are hiked accorrdingly to accurate price the cramdown risk.</p>
 
Max - 5) Because in a country that respects and protects private property, it is wrong to void or modify a contract which has a possibility of being fulfilled. Bankruptcy does not preclude the fulfillment of a mortgage contract. Foreclosure is fulfillment. It doesn't matter who is suffering, paying the price, the possible results of mass foreclosures, or any other ending. We don't break the law because we do not like the outcome. Without the law, judges can do whatever they think best, for whatever reason. Judges are supposed to uphold the law, not create it.
 
<p><em>Um, we're talking cramdowns. There's no subsidy here. If, during the bankruptcy proceedings, the judge determines they can pay a mortgage at current prices, he resets the mortgage to that price.</em> </p>

<p>If the cramdown goes to both market rate and market price. Frankly, I don't see how that benefits the borrower. What's market rate from someone freshly entering bankruptcy? I seriously doubt when people are talking cramdown they're thinking of taking a typical family, reducing their debt and reseting their mortgage to 9% (subprime and let's face it, they're in bankruptcy court, they're SUBPRIME) </p>
 
The mortgage rate is not reset, only the value.



In terms of cost to the taxpayer, lenders will be WORSE off with foreclosures over cramdowns, because they pay the FC cost AND will get an REO discounted price. Since we're going to end up backstopping failing lenders, cramdowns will save the taxpayer money too.



As to mortgage rates - they didn't go down when cramdowns were stopped in 1993. Why will they go up when we take them away?
 
<p><em>"lenders will be WORSE off with foreclosures over cramdowns"</em></p>

<p>If this is true, the lenders can workout a lower mortgage or interest rate or whatever is in their best interest. The lenders do not need a judge to figure if a foreclosure is worse or better for them. And the taxpayer is not a party to the mortgage contract so if the contract may be fulfilled, it is none of the taxpayer's or the judge's business.</p>
 
Didn't read all the comments but don't you guys realize that the bankruptcy law was only amended in 74 to give special status to mortgages. Why should mortgages be treated different than other assets in a bankruptcy such as autos, RV's, boats and airplanes? All assets at time of bankruptcy are apprasied and a value is given to them. Cars depreciate, boats depreciate and homes sometimes also depreciate. Creditors are just creditors. A bankruptcy judge should have the discretion to lower the balance due on the note match the value of the asset at the time of bankruptcy, that's what happens to all the other assets.



Personally, from my reading your making a mountain out of a molehill. Only a very small percentage of bankruptcy's will result in cramdowns. In the vast majority of cases, the petitioner will not be able to service the note anyway and the assest will revert to the lender.
 
Alan,



"...your making a mountain out of a molehill. Only a very small percentage of bankruptcy's will result in cramdowns. In the vast majority of cases, the petitioner will not be able to service the note anyway and the assest will revert to the lender."



I certainly hope that you are correct.
 
<p>alan, the precedent it sets and the effect it will have on the mortgage market in the future is where the problem occurs. It isn't the number of cramdowns that might occur, it's that they can occur at all.</p>

<p>By pooling several thousand mortgages into securities, banks were able to move those mortgages off their books and replenish their reserves with the proceeds, allowing them to make more mortgage loans. If investors refuse to buy them due to uncertainty the stability of the repayment value, it drastically reduces the amount available for mortgages. This has already happened due to uncertainty in the repayment rate and the results are terrible, but allowing those investments made by other people to be randomly valued by some BK would further confuse the intrinsic risk of those securities and make them impossible to market. The lack of available capital would result in even fewer buyers, further reducing the prices seller can ask, while simultaneously forcing interest rates to rise to induce more investment and deposits. All of which means fewer jobs, lower wages, higher prices, flatlined equity growth, and a severe shortage of funds available for any other kinds of capital or municipal investment.</p>
 
awgee, we're talking about the industry that just lent trillions of dollars on high LTV during the biggest price bubble of all history. It's not wise to bet the financial industry on their better judgment <b>again</b>.
 
FE - I did not tell anyone to bet on the financial industry's better judgement. I said lenders do not need a judge to figure out what is in their best interest. If the lender does not succeed in doing what is in it's own best interest, then it will fail, as it should, and it is not the government's job to keep bad businesses from failing. Nor is it the government's job to break contracts which have a possibility of being fulfilled.
 
Interesting and illustrative excerpt from today's front-page New York Times article on people just walking away from their homes:



"Last year the median down payment on home purchases was 9 percent, down from 20 percent in 1989, according to a survey by the National Association of Realtors. Twenty-nine percent of buyers put no money down. For first-time home buyers, the median was 2 percent. And many borrowed more than the price of the home in order to cover closing costs.



?I think I could make a case that some borrowers were ?renting? (with risk), rather than owning,? Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard University, said in an e-mail message.



For some people, then, foreclosure becomes something akin to eviction ? a traumatic event, and a blow to one?s credit record, but not one that involves loss of life savings or of years spent scrimping to buy the home.



?There certainly appears to be more willingness on the part of borrowers to walk away from mortgages,? said John Mechem, spokesman for the Mortgage Bankers Association, who noted that in the past, many would try to save their homes."



We really should stop wringing our hands and gnashing our teeth over the fates of these renters. No money down and no equity means the houses were NEVER "theirs" to begin with.
 
Righeimer hasn't bothered to pay attention to how cramdowns work. A judge can't cramdown a mortgage below the market value of the house. Geez, if somebody is going to write a published newpaper article criticizing a proposed bill, is it too much to ask that they actually talk about what the bill does as opposed to make stuff up?
 
<p>I think he assumed that home prices were going to fall to the level of the cramdown (in this case, $395K).</p>

<p>It does highlight the moral hazard of this problem, doesn't it? Is the moral of the story "make sure you speculate in the biggest and frofthiest bubbles so when they tank the gmnt. will bail you out"?</p>

<p>Or is the moral of the story (for the lenders and borrowers both) "You shit in this bed, now you get to sleep in it for a while."</p>
 
Fair, I think the point that Righeimer is getting at is that people who lie to get into their homes, or people who made no material investment in their homes (no down-payment, 100%+ equity loans so they didn't even pay closing costs) and who have actually taken money out - those people deserve NO bailout, and a cramdown WOULD be a total giveaway of bank money to completly undeserving people.
 
CM_Dude: Well, the money's gone anyway. If it's not (i.e. the borrower has meaningful assets/adequate income) the excess debt becomes unsecured and becomes part of the repayment plan. The question is should we spend even *more* money from the bank and the taxpayers who will almost certainly be bailing out the banks in order to punish the borrowers? And if we should why are all other assets and all corporate borrowers treated differently by being allowed cramdowns?



Bankruptcy judges have the authority to stiff fraudsters by denying cramdowns (or other bankruptcy relief) and often do. If the bank were clean and the borrower fraudulent I would expect (and prefer) that the judge deny a cramdown. In the Great Housing Bubble, though, most hands are dirty. To borrow No_vas' metaphor, as long as the cramdown value is between the loan value and the market value (inclusive) it's just the lender and the borrower in the bed of predigested nutritive material.



No_vas: I honestly doubt anybody writing for a newspaper in OC is predicting a 54% price drop.
 
http://www.dailypilot.com/articles/2008/03/01/blogs_and_columns/rigonomics/dpt-righeimer03012008.txt



Mr. Righeimer is a douche... "If passed, it, among other things, would allow bankruptcy judges to lower the principal and interest payments on a home loan to the amount the borrower could now afford based on their income when they filed for bankruptcy." That's why I don't read the Daily Pilot. Small papers with no editors should go broke and fade away.



To repeat.. At the time of bankruptcy all the petitioner's assets are subject to counting (that means appraisal) cars, houses, boats, planes, jewelry, cash, stocks etc and these assests are then balanced against all outstanding debts. In the 70's the law was changed to give special status to mortgage lenders, the proposed amendment to the law removes this special status so the the judge could order a reduction of debt on the loan to appraised value of the asset at the time of bankruptcy. This actually saves the lender anyway because if the lender has to take the asset back then sell if for the appraised value the lender loses more due to holding and transaction costs. The law in no way lowers the debt to the amount the petitioner can afford and if the petitioner can't afford the house at the new debt level, which is 90%+ of BK's the the asset (home) will return to the lender anyway.



Getting rid of the special status for home lenders makes perfect sense. Carve outs for special interests never make sense in the first place.



This just doesn't spin well in the press because people are stupid.
 
Fair and Alan,



Thanks for the clarification. I honestly hadn't considered the judge using discretion and denying fraudsters. Unfortunately, my BK experience is dated (early 1990s) and was in Dallas when I worked for a bank's legal department, handling BK correspondence. Our bank made no appearances in most BKs and just wrote everything off.



I have not read the text of the proposed law and am admittedly reacting out of ignorance and righteous indignation. It may be heartless, but my opinion is that no one should keep anyone in a home they cannot otherwise afford to live in...



Funny about Righeimer - he is being propped up as a potential GOP golden boy!
 
The thing that gets me about BK, and I'm not a lawyer, just a concerned citizen is that if you follow BK's in the USA, a little over 1/2 of all BK filings are due to catastrophic medical bills. That's right, someone gets sick and even if you have insurance the bills are so high you can't pay. I think it was 20/20 that had a young family that had triplets premi and one was in the ICU for nearly 1 year. Doing better now but medical benefits ran out and the family's share of the bill was well over $1M. They didn't want to file BK but had no choice. Without the BK rules they would have lost their house.



Say all you want but if we had a national health care system like Canada, the UK and most of Europe, a little over 1/2 of all BK filings wouldn't occur!
 
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