You know, that contract law thing, whatever.

Cram-downs? Why can't the FBs just rent? It's not a tragedy for these folks to have to move to a rental. My family rents. Is that such a tragedy?

Since my family are renters I'll be posting a website on which you can make generous donations to our tragic renting family. In lieu of flowers, we expect cash, real estate, or stocks. Thank you.

ice dead cat bounce

The banks have Ben and the Fed.

We the people now have Judge Judy and Judge Wopner (sp?).

We also have sharp pitchforks and loaded shotguns.

We'll win, but it won't be pretty.

Surreal, now bankruptcy's goal will be preservation of homedebtor gambling tickets (appreciation potential) at expense of the lender.

And we're also providing job security for the fraudulent appraisers who got us into this! Just like in Enron where the accountants ended up with a new book of socially useless Sarbox business. It will be amusing to see the guy who said some McStucco box was worth $800k when paid by the mortgage broker come into bk court for the deadbeat saying its worth $100k. Maybe there will there be lists of lowball "preferred" appraisers used by the homedebtor bk attorneys.

Without having the deadbeats give up significant share of long-term appreciation potential, this proposal is a new avenue to reward fraud and stupid speculation.

There will come a time in the BK proceedings when the judge will be reviewing the FBs 2004-07 1040s and the loan docs side by side and see a discrepancy. Just how much cramdown does his honor enforce in the case of fraud? How many of the BKs that appear before him won't have evidence of massive loan fraud? Does this officer of the court do the right thing and declare debts due to fraud are not wiped out in BK or does he do as instructed and punish the lender/victim with a cramdown as instructed?

This is going to get complicated for the appraisers. Does nudge-nudge wink-wink mean a sky-high appraisal, or a dirt-low one? We'll need to develop a new set of signals for appraisals.

Steps to Wealth:
- Buy McMansion
- File Chapter 13 bankruptcy and produce tax returns with understated income
- Get a nudge-nudge wink-wink lowball appraisal on the McMansion
- Plead poverty and have bankruptcy judge write down the value of the McMansion
- Wait for Real Estate to begin appreciating again
- Profit

Harm, i simply don't believe that your statement (while theoretically correct) will work in practice. Usually in a cram-down the debtors are given the EQUITY in the new entity. Here, that is retained by the speculator.

The homedebtors aren't facing imminent loss of equity if they have a fraudulent appraiser make up a low number. They wait 3 years for the plan to expire and then sell, keeping the profit from their fraud.

Appraisal fraud got many of the "victims" into this situation in the first place. It may get them out too, but it sure won't help the population at large with the underlying problems in the housing market- extreme debt levels, speculation, and unaffordability.

And if it really "helps" subprime borrowers, watch prices go into a deflationary spiral as mortgages become extremely scarce and expensive, driving prices down, driving foreclosures and "cram downs" up.

Cram down could make sense if the lender retained a significant % of long term appreciation potential. But that approach requires more thought and effort than our politicians can muster.

Cram-downs have always been around, but the difference here is that the creditor keeps the collateral--and keeps the rights to appreciation on the collateral. Not sure that there is such a strong precedent for that.

It's like a brokerage making a margin call on an account where shares bought on margin have dropped in price, and the investor can't meet the margin call. So it goes into bankruptcy, and the judge recognizes that the investor can't pay, so he writes down the amount of the margin debt. But the investor keeps the shares!

This is the future of contract law?

(And who's going to lend in that kind of an environment?)

Are any policymakers even discussing combining the cramdown with debt-equity swap? Or somehow giving the crammed-down lenders a share of any appreciation that might (ha!) happen?

That would seem mitigate the moral hazard that the cramdown option entails.

E.g. I borrow $100k for a $100k property. Price declines to $90k. Loan is crammed down to $90k, but lender gets X% of first Y% of appreciation over $90k, say 100% of first 20%.

"So, all this law is really doing is closing a loophole for primary residences, then?"

Yup. That loophole made more sense when most mortgages were fixed rate and lenders weren't throwing money around like drunken sailors. But not today.

OT
Treasury Budget - Level
Actual $-98.2B
Consensus $-90.0B
Previous month $-55.6B
Previous year $-73.0B

still a bit worse than last year...

Tanta: "It often costs lenders too much to pursue criminal charges against a speculator"

I think that's the math for all classes of borrowers, not just speculators. I can't think of many instances where it's worthwhile to go through the legal fees and backoffice work to locate the documentation and press the charges. From what I have seen, the lending industry has become downright lax on pursuing fraud, simply because it doesn't add up for them.

Look at identity theft. Only when there was massive outcry from the general public did lenders start moving on it. Even now, it's hard to get them to even pick up the phone when your identity has been stolen--even if they could end up being on the hook for thousands of dollars! It's a cost of business, it just goes into the loss reserves and they call it good.

Contrast that with the insurance industry, which has made taking action against fraud a part of its strategy. They have been active and high profile in their pursuit of fraud, because while they rarely (if ever) recover the full amount lost (plus fees etc.), it provides a net benefit for the whole industry.

Residential real estate and consumer credit lenders don't get it. If Casey Serin ever files bankruptcy, I would fall over with surprise if even one of his lenders so much as noticed (other than CashCall, but they've got a strategy all their own.)

sportsfan: "PV, I'm guessing you've never been a creditor in a BK proceeding where, as a matter of course, 'the contract is being modified without any effort being made to compensate the losing party.'"

I have not been a creditor, I'm not that rich . But in a traditional BK proceeding, there is an effort made to compensate the losing party. If the debtor has assets, those assets are available to be sold to meet the debt. Of course, there are wide classes that are protected from that, but in theory that's how it works.

From what I can tell, this (proposed) law would make it so that the lender gets nothing, not even a nominal right to something that might in theory exist, like money in a bank account, or a second home with equity in it. That, I am arguing, is not good contract law.

HARM: Yes, I think a right to appreciation in the property would count as (partial) compensation for the lender's loss. There are going to be some homes marked down to unthinkably low prices within the next few years--homes that subsequently will appreciate in value. To let the homeowner realize the full benefit of that, not despite of, but BECAUSE they got into too much debt, is just plain wrong.

Uh, David_in_ct- see Brian's latest on Sagittarius to see exactly what I mean- now translate to Connecticut space.

How do you gear a hedge fund?
I don't care how many quants you lay end to end, but how do you gear it?

Somebody loans you either money or securities. Now if that loan is called, you have no gearing and you have to liquidate. Not talking about SAC or Gendler or a few of the ones without debt, but the average trader leaves GS or BSC and gets seed money and gearing, capishe?

Someday this war's gonna end...

The House can pass anything it wants but 60 votes are required in the Senate just to get to a vote and the Democrats don't have near 60 and ,if they could by some magic, then Bush would veto and 2/3s would be required to override. Never happen.

Don't be so overconfident. Yes, it was a close vote today, but this crisis - and its impact up on Capitol Hill - is just getting under way.

Lawmakers usually want to keep their jobs, so as their voters start pressing for Congress to "do something" as we tumble into a recession, this bill's prospects can only get better. And substantive legislation does get tacked onto "must-pass" appropriations bills - look at the REAL ID Act, for example, which would never had made it into law as a standalone bill. That one didn't even come up for a vote in the Senate.

I'm not saying for sure that it's going to pass, but the political landscape is going to change pretty drastically around here.

From Daily Mail (UK)

(quote)

Hundreds of top moneymakers at Goldman's Fleet Street offices will be getting £500,000-plus payouts after the company had an outstanding year advising on massive takeover deals.

Unlike most other investment banks it has avoided the worst of the global credit crunch. Its bankers, renowned in the City for being the smartest, guessed the US property market was heading for a fall in the spring and sold off much of their subprime liabilities to rival banks weeks before the mortgage market collapsed....

London bankers at Goldman Sachs have been awarded bonuses of at least £5 million each

Goldman's London traders and bankers this morning filed into their managers' offices to be told how much they will be paid.

"This year's bonuses are amazing," said one source. "There will be very few disappointed souls on Fleet Street today."

Employees are sworn to secrecy, mostly told that it is a sackable offence to tell colleagues how much they have earned.

Goldman Sachs is paying out a record bonus pool of £9billion across its global workforce, an average of £300,000 for every member of staff.

(end quote)

Gary: " I am beginning to think the problem is that you don't understand all that much about contracts, law, bankruptcy, or secured lending."

Yup. I don't understand them, which is why I'm not in the industry, which is why I haven't lost billions of dollars for myself or other investors. I am thanking my lucky stars that I didn't know enough about the lending industry to delude myself into thinking that I could make any money off it, or enough about contracts to be fooled into thinking that a court of law would enforce them (and not change the contract law ex post facto.)

sk: Yes, they are changing the code, that's the problem. Contract law is the foundation of the economy, but nobody is going to want to build if they think the foundation is shifting.

How about this, everybody who wants to do residential real estate lending in this environment, who wants to put their own money on the line to lend to someone who wants to buy a house, secured by the value of that house (or not, depending on what the judge decides), just speak right up.

Anybody?

"Cram it up your cramhole, LaFleur!"
- White Goodman ("Dodgeball")

I'll lend you money. 10% annual interest on 70% LTV and 3x Debt/ Proven Income. No blemishes.

And I don't lend in CA, FL, NV, NJ or DC.

Call me if interested.

"off topic: i'm just going to cast a vote for re-banning moe/doc."

I second.

hiker90: My question is, theoretically, why shouldn't individuals have the same flexibility as corporate America in bankruptcy.

For the corporations, by the corporations!

Markel: "I'm mystified. For those against cramdowns, could you please explain why a the successor to a lender who made, say, a completely undocumented loan on badly-appraised asset based on utterly sloppy underwriting should take precedence in repayment over other, more responsible creditors in a financial failure that these lenders have themselves provoked?"

Because, traditionally (that is, before Congress started hitting on its current string of good ideas), there was a legal separation between the home and home loan, and all the other assets and loans. When somebody went into bankruptcy, the court could technically seize assets to be sold to satisfy debt--but the home was safe. As long as the homeowner kept the mortgage current, bankruptcy could not take the home.

Conversely, the mortgage lender could take the home if the borrower fell behind on payments--but they didn't have access to any of the borrower's other assets.

Since the home was separate from the rest of the balance sheet (so to speak), bankruptcy judges couldn't modify it (just as the foreclosure court can't modify other credit balances not related to the home.)

It's ridiculous that people think of it as inconsistent that bankruptcy judges can't (yet) write down mortgages. It's not inconsistent at all. It's a special arrangement--the owner cannot lose the home through bankruptcy proceedings, but that comes at a cost, namely, that they also can't get the mortgage reduced in bankruptcy.

This completely overturns that legal arrangement, and is one big step on the road toward making mortgages the equivalent of unsecured debt. Every time the expected recovery rate of home loans goes down, rates go up. If that happens, everyone suffers.

re: nasty WaMu predictions upthread and elsewhere: why does WaMu seem to be winning the race to the bottom with CFC? Can anyone posit WaMu's latest vs. CFC's mainline to the FHA?

I need to know. One of my hottest men is a WaMu exec, a rippin' old WASPy stud with an 8-pack whom I'd just as soon stay that way. (PS, nice guy, too. F'real!)

Regarding the MBIA/Sagittarius CDO deal structure question:

MBIA and others usually insure the super senior portion of a CDO. They are not on the hook for tranches originally rated AAA, AA, A etc. The super senior tranche is usually around 80% of the deal. MBIA is given the right to take control of the deal when certain triggers are hit.

It appears the downgrades of this CDO set off the trigger. MBIA has repo'd the CDO and will try to liquidate it to protect its position.

In the typical deal, MBIA would have a 20% cushion. The CDO could take a 20% hit before MBIA is on the hook for losses in the 80% Super Senior tranche.

PeripheralVisionary:

When you say 'traditionally', do you mean prior to 1978? That's when the prohibition on courts modifying home loans on primary residences was passed by Congress. And, as Tanta pointed out in one of her earlier posts, judges continued to cram down balances until a clarifying Supreme Court judgment in 1993. Do you believe Congress undermined contract law with its actions in 1978?

"The best part about this bankruptcy approach is that it leaves the taxpayers - especially innocent renters like me - the hell out of it."

Not much sympathy for dumb lenders here, but let's remember that Fannie and Freddie are the largest mortgage holders. They have avoided the worst excesses, but any proposals that result in a wholesale shift of value from lenders to borrowers (a bailout) will effectively be a "TAXPAYER funded bailout". I am assuming that Fannie and Freddie will end up in default also in which case taxpayers are on the hook.

This is based on the assumption that "cramdown" will spread to the entire market (why would pols leave the cheese stealing just to the subprimers when many other voters can be "given" purloined cheese).

The idea of junior non-interest paying debt could make cram-down work- but it is more favorable to the lender than "shared appreciation/ equity participation" if property values have a likely long-run of no/slow appreciation.

david_inCT,

Re: Hedge fund redemptions, don't most hedge funds require investors to give 6-12 months notice before they can actually pull out funds (i forget the technical term)?

That would mean that most hedge funds, at this time, probably wouldn't need to liquidate or unwind any positions just yet, though you would think that some redemptions have already started coming in.....

dbblg: To a certain extent, every time Congress changes contract law retroactively applicable to existing contracts, it undermines contract law. The question is if the benefit (sometimes better contract law) is worth the cost (the cost to the economy of the implied risk of future changes to the contract law.)

I don't agree or disagree with current bankruptcy laws, but for the most part they do make sense. They're basically treated as separate balance sheets, with a few entities like home equity lines of credit living in both worlds. But at its essence, it makes sense.

Markel: "You do know . . . "

Yes, yes, yes, and yes. Of course there are exceptions to the general case, but the exceptions prove the rule, that in general there is a firewall between the home and its financing and the rest of the consumer's balance sheet. There are some holes in that wall, but 99.99% of the time a consumer won't lose their home for missing a payment on the car, and 99.99% of the time a home lender can't take the keys to the car to satisfy a delinquent home loan.

My point was to counter the crying (Kleenexes indeed) over supposed favor toward corporations in the bankruptcy law. When the department store can take your home because you're behind on your store card, then I'll concede the point that the law is in favor of the corporations. I am sure there are corporations who would dearly love to have the sort of asset shelter that consumers enjoy in owning a home.

No, however I have blessing to represent Fund For Unclaimed Deposits at Bank wich is Very reputable, I honor you with you're attention to my request of which I prey God you will contact me Soon as I am in need of business Partner to repatriate Funds.

I am very interested. My loan officer, Mr. Cramdown, needs some verification of your authenticity before he will release the funds for this transaction. Could you possibly send me a photo of yourself holding a sign that says "Cramdown" on it? Thank you in advance for your cooperation.

Apartment 604: "At this point, I doubt prime loans will be included."

You're right, because as it turns out, the problems in the credit markets are Contained™.

Oh, wait.

But in a Congress where decisions are made on anecdotal stories of poor unfortunate souls, you can be certain that this will be expanded. They'll find one person who falls just outside the parameters, and that will be enough to expand it.

"Enid McHomeowner bought her lovely new house just two years ago. But with an illness in the family and some unexpected expenses, she quickly fell behind on her mortgage payments.

"She would qualify for debt relief as recently passed by Congress--but for one problem. Rather than a sub-prime loan, she has an adjustable-rate loan from Countrywide Financial. And since she's not in the sub-prime category, she doesn't qualify from relief from the debt that's ruining her life.

"And that's what Congress is proposing to fix in a bill introduced today."

uncle festus: My biggest concern as a worker in the bankruptcy vineyard is that whenever they dink with the Bankruptcy Code they throw in various pork-barrel provisions/changes that are written in the middle of the night by Congressional staffers over pizzas and beers that make no sense in the light of day and cause lawyers and judges to scratch their heads (and things lower in the body) trying to figure out what the heck to make of something that makes no sense.

Look at the bright side. Those pizza and beer sessions can make you a lot of money! Policymaking conjures up images of politicians sitting around and programming a giant supercomputer with the fate of the world at stake. I wonder how it will turn out?

And the Lebowski joke was meant for Fitch on a thread up. Doh.

jk: In the typical deal, MBIA would have a 20% cushion. The CDO could take a 20% hit before MBIA is on the hook for losses in the 80% Super Senior tranche.

Do you know if the CDO squareds are also like this?

Yes, it is more of the same. A typical CDO squared carves out a samll piece (the A tranche) of a CDO. The CDO structure is overlaid on the carved out piece of the CDO. i.e. Super Senior, AAA, AA, A etc. tranches are applied to the small piece carved out of the CDO.

Do not try this at home!

"Re: Hedge fund redemptions, don't most hedge funds require investors to give 6-12 months notice before they can actually pull out funds (i forget the technical term)?"

The only funds that generally have long lockup periods are the very largest and most successful. Few if any of these would have very high concentrations in mortgage debt. The more specialized funds which might have the stuff are much much more likely to have monthly or quarterly redemption periods.

All in all I would say that the hedge fund universe will take the smallest proportional hit from the mortgage fallout when compared to banks, pension funds and the like.

As a consumer bankruptcy attorney, I can only agree with the comments of uncle Festus. It seems like the more educated my clients are, the more misconceptions they have about bankruptcy.
As for low-ball appraisals, battles over dueling appraisals on homes occur even now in bankruptcy court- and BK judges seem to be capable of sorting things out.