Lamh Foistenach Abu!
Posted on 02/26/2009 7:11:32 AM PST by pilgrim
by David C. John WebMemo #2310
Bad policy is not improved by limiting it to certain situations. The Helping Families Save Their Homes Act (H.R. 1106) would allow bankruptcy judges to reduce the principal owed on a mortgage, a practice often referred to as a "cramdown." Judges would also be able to reduce interest rates or lengthen the term of the mortgage. This is a huge policy mistake that will help only a few people while raising the cost of borrowing for thousands of moderate-income and first-time homebuyers.
Although supporters claim that this is a limited provision that applies only to existing mortgages, the cramdown language can easily be amended to make it permanent at a later date—which would then be priced into future mortgages. In addition, the House bill even lacks many of the targeted limitations designed to make sure that bankruptcy is a last resort—limitations that were included in President Obama's poorly considered housing plan.[1] It even weakens language passed earlier by the House Judiciary Committee that was designed to keep those who filed fraudulent mortgage applications from taking advantage of cramdowns.
Problems with Cramdowns
Allowing bankruptcy judges to modify mortgages would:
* Raise mortgage costs. Cramdowns would add additional risk that mortgages will not be repaid as the contract requires. Lenders must charge for that added risk, and experts estimate that the additional costs would raise mortgage rates by as much as two full percentage points or substantially increase required down payments.
These added costs would fall hardest on moderate-income and first-time homebuyers, who have a higher risk of defaulting on a mortgage. This will price many families out of the housing market.
* Further undermine the value of mortgage-backed securities. Banks and other investors are already facing heavy losses because mortgage-backed securities have lost much of their value because of uncertainties about whether the mortgages will be paid. The language in H.R. 1106 increases this uncertainty. Investors will be at risk of both foreclosure and cramdowns that reduce the earnings of these securities. Many cramdown mortgages will later go into foreclosure. Since investors have no idea what this new provision will do to the value of their securities, prices will drop further. * Fail to help many homeowners. Only one-third of all Chapter 13 filers complete the process successfully and get the fresh start that bankruptcy promises. The other two-thirds "pay court fees, pay attorney's fees, pay fees to the bankruptcy trustee, invest time and money to restructure their financial affairs, and then wind up with nothing more than temporary relief. It is therefore not surprising that a substantial number of Chapter 13 filers—nearly one-third—go on to file for bankruptcy again."[2] (end snip)
Please read the rest!!!!!!!! http://www.heritage.org/Research/Economy/wm2310.cfm
Take care...............pilgrim
“The American people will never knowingly adopt socialism, but under the name of liberalism, they will adopt every fragment of the socialist program until one day America will be a socialist nation without ever knowing how it happened.” Norman Thomas, a socialist and member of the American Civil Liberties Union
Lamh Foistenach Abu!
There’s another danger to allowing bankruptcy judges to modify mortgages: it violates all the principles of contract interpretation and will make people uncertain as to the enforceability of their contracts. Judges can’t rewrite contracts; they can only interpret the provisions of the contract. People can enter into any contract they want - as long as it’s not against public policy - and there’s no public policy prohibiting people from entering into contracts they can’t perform.
Maybe this will drive banks to be more flexible in tougher times. While lower down on the list of causes to this, banks could have stemmed the depth of this mess by being more willing to work with borrowers rather than against them.
Just floating this plan increases the risk inherent in home mortgages. Higher risk investments requirer higher returns so interest/points have to go up or availability of mortgages will go down. Implementing this Act will drive low income people out of market. Well unless government subsidizes the loan, like the City of Houston’s just quashed idea.
Lamh Foistenach Abu!
Having the Government maintain the Bubble prices at taxpayer's expense only prolongs the idiocy and prices out of the market the responsible buyers that can actually afford to pay a fair market price.
I’m only in partial agreement w/Heritage here.
If this problem is to be disappeared, either mortgage principals, home values, or bank stock prices will have to be crammed down. (Or some combo) I seriously dislike the judicial approach because (as posted later) it trashes contract law and is such a wide open invitation to judicial fraud that it’s ridiculous. Plus it has to happen case-by-case which will be infinitely tedious. Plus it has a tendency to not work in a significant fraction of cases. Thus it has limited “finalization” value.
As for home prices, if they tank further (and IMO they should) then it’s inarguable that MBS will be harmed. But these are crappy deals, and I don’t see a mathematical solution. I am in the camp that says home prices have been 3x gross incomes for 75+ years, there’s a reason why, and the market will force those elements into alignment no matter what artifice may be used or tried or temporarily propped up. I can’t see a good argument for bankrupting the system for individual errors, no matter how widespread those errors were. (Although the system, ironically, appears to favor this approach) If the deal made is impossible to maintain, the deal, not the system, should be dismantled, the home(s) foreclosed, and the market cleared. There is ample precedent for “impossibility” in current law.
The banks are the ones getting taxpayer funds to clean up their acts. They are the ones whose stock prices should be crunched. “Cleaning up their acts” means getting rid of off-balance sheet black-hole debt. We’re already stressing the system to the brink of implosion bailing out the banks, for better or for worse. So, I would prefer the banks to get the benefits of taxpayer largesse and suffer the pain of cramdowns, as the best of these several unpleasant options. At least there would be the idea of confining the damage with this approach.
You are right but....................What has stopped activist judges ‘til now?
It will (imo) just raise interest rates and hurt housing!!
Cash (what is left) will be king?
Take care………pilgrim
“The American people will never knowingly adopt socialism, but under the name of liberalism, they will adopt every fragment of the socialist program until one day America will be a socialist nation without ever knowing how it happened.” Norman Thomas, a socialist and member of the American Civil Liberties Union
Next, they will “cram down” lower payments for car loans, student loans, and credit card payments then transfer the debt to taxpayers. This country is turning [blank].
Hell....the District of Oregon essentially erased the lease provisions of the code with Miller v. GMAC.
Cramdowns are perfectly appropriate for mortgage loans that lenders knowingly made on completely irresponsible terms. We WANT to discourage lenders from resuming that practice. There are a huge number of mortgages out there that were made with ridiculously low down payments on what was obviously a bubble-market price to begin with. Many lenders weren’t taking the slightest interest in borrowers’ ability to repay, but just assuming the housing bubble would keep bubbling, and either the borrower would sell the house at a profit or the lender would foreclose, and either way the lender would get all their money back.
There are natural cycles in almost everything.
A good read is here. http://www.marketoracle.co.uk/Article8988.html
Hope you do not have any investments in real estate or need a loan.
GLTY!!!
Take care………pilgrim
“The American people will never knowingly adopt socialism, but under the name of liberalism, they will adopt every fragment of the socialist program until one day America will be a socialist nation without ever knowing how it happened.” Norman Thomas, a socialist and member of the American Civil Liberties Union
heard Judge Nepalitano on the radio yesterday discussing the strings that congress it trying to attach to the bank bailouts-limiting compensation etc. He said that to do such things would be unconstituional-the govt injecting itself into “contracts”. If that is the case I would expect these mortgage cramdowns to be viewed the same way-the govt is interferring with contracts that have been entered into legally by the parties.
obvioulsy knows nothing about the market.
1. cram down is available RIGHT NOW for investment property.
2. short sales are allowed to everyone BUT the person in the house due to self dealing rules.
3. a foreclose still results in a loss.
4. the cram down is AT CURRENT MARKET VALUE to the person in the house.
If people would just focus and understand what this does is put the asset back into commerce it is not a bad thing.
The argument centers on WHAT IS THIS HOUSE WORTH?
THEN and only then, can the home owner pay it?
we have this now on investment property.
this is not new.
2nd mortages are being stripped off properties all the time.
that is a red herring.
remember the 2005 bankruptcy reform was to try and head off the housing bubble by fixing the rules to prevent cramdowns. They did not expect people to start walking away and buying the identical less expensive homes across the street.
it was never so in the past, it is not so now with investment property which still has cramdown.
This is not about the persons, this is about “what is the house worth?”
but the two parties have entered a contract that’s terms are determined by the value of an goods being exchanged. When a judge alters the value of those goods (in this case adjusts the principal of the mortgage down) are they not injecting themselves (unconstituionally) into a contract?
Then change the law going forward. But don't change it retroactively, after they made loans under a set of rules that didn't allow cramdowns.
Also, bankruptcy judges are generally sympathetic to the bankrupt party, and so it's hard to trust their valuations of property, which is why lenders are so opposed to cramdowns like this.
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