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Oh my god.....
woooo.
Johnny boy is also sponsoring the law to create a "Copywrite Corps", or basically jack booted thugs at the whim of the RIAA and the MPAA, and he's one district away.
GOtta remember to send him snail mail with "cramdown good, copywrite thugs bad!"
Casinoworld rolls on...Fed to take 'wide range' of collateral plus currency swaps (Bloomberg news crawl)
more from the fed:
FRB press release
This strikes me as the key to whether something will be done that has any chance of helping borrowers (and only those borrowers) who were victimized by unethical practices that stop short of outright illegality.
However (1) can legislation passed now affect mortgages written previously, i.e., is there an ex post facto issue?
(2) Who has appointed the bankruptcy judges? Might there be a widespread refusal to use any new powers given to them?
Well, it isn't contained.
Congress should legislate-away everything bad. Nothing stops a landslide like strong legislation against landslides.
Please note that the euro is off its highs. It doesn't seem to be able to get it up with the traditional French insouciance of just a month ago.
Why? Not enough eau-de-cologne to disguise the body odor?
Nope.
Not enough dollars. When there's a liquidity crisis, there's a liquidity crisis. The hot money has run out. The man on the street would have to be buying euros now, and he isn't.
@Billy Hill :
(1) The law doesn't change the mortgages written in the past; it changes bankruptcies that will happen in the future. So no ex post facto.
(2) Judges are appointed in different ways in difference states but in general they pretty much do as they please anyway. How anybody comes out of a restructuring bankruptcy already is tremendously affected by the judges' inclination and whether they got out of bed on the wrong side that morning. This law will give the judges some more leeway but not change the basic situation.
However (1) can legislation passed now affect mortgages written previously, i.e., is there an ex post facto issue?
We're talking about bankruptcy law. BKs are always ex post some loan's facto.
Every law like this they pass pushes further out into the future any house purchase I might want to make. If "those people" get a cram down, and then the market recovers, do they get to sell and keep the profit?
Fed announces credit auction. I can't find the link to the working paper on which the auction is based, though I remember reading it.
I'll keep searching.
Good thing all those home loans are fully secured by mortgages ... ooops, guess they're not.
"If you know a judge can rewrite your mortgage, you may well write it more carefully up front."
or maybe they won't write it at all.
I vote for not at all.
The people saved through cram downs are going to have a Chapter 13 on their credit history, but the people saved by Hope Now will not have any mention on their's. Interesting.
The Federal Reserve will hold four term auctions to add liquidity to the banking system, it announced today, in cooperation with the Bank of Canada, the Bank of England, the European Central bank and the Swiss National Bank. The Fed has also swap agreements with the European Central Bank and the Swiss National Bank.
The measures "are designed to address elevated pressures in short-term funding markets," the Fed said in a statement announcing the auctions.
The first of the TAF auctions will be on Dec 17 for up to 20 bln usd with a 28-day term. The second will be on Dec 20, also for up to 20 bln usd and with a 35-day term.
Third and fourth auctions will be conducted on Jan 14 and 28 with amounts to be decided in January.
Roasted shorts.
bacon dreamz,
OT sorry, but that sure looks like the triple witching bailout.
Cheers,
So this will allow judges to give you that house you never could afford but chose to buy anyway?
Sounds wonderful.
I am still somewhat nervous about giving judges cramdown authority. The reason is that the credit card lobby will figure out a way to eliminate some mtg debt so there will be more to pay them. The last time the law was changed, it was in favor of that industry and they took that to a new extreme by granting more credit under "easier" terms. Sure job loss/illness may the the primary reason for filing, but I think if they didn't owe 5000 on 10 different cards, maybe they could afford to pay the mtg.
No one will file a 13 because they have a toxic loan or are upside down; they file because they have too much debt. How a judge cramming new mtg terms will change that overall picture is unclear to me.....IMHO, the risk of untended consequences down the road is a bigger issue than allowing judges to modify mortgages.
Love the idea that fraudulent appraisals that got us into this mess will get us out.
So can I now "pay-off" my mortgage by devaluing my house? If you thought the vacant with the crack-head squatter was bad, well I'm thinking a couple cars on blocks in the front yard, washing machine on the porch and some well placed grafitti. Might even have to do up my neighbors too. What a great way to build equity without all those pesky payments!
At the very least, let's create some equity participation warrants that give a portion of any upside to the lenders here.
OT - Fed announces alliance with global central banks.
Business, financial, personal finance news - CNNMoney.com
"WASHINGTON (AP) -- The Federal Reserve announced Wednesday it is coordinating with other central banks to deal with the global credit crunch.
The central bank said it had reached an agreement with the European Central Bank as well as the Bank of England, the Bank of Canada and the Swiss National Bank to address what it termed "elevated pressures" in credit markets.
The Fed said that it was creating a temporary auction facility to make funds available to banks and was also setting up lines of credit with the European Central Bank and the Swiss Central Bank that could be used for additional resources.
The Fed said that commercial banks would be able to bid at auction for funds that would be drawn from the Temporary Auction Facility. The money would be intended to help cash-strapped banks raise money needed to keep making loans to businesses and consumers.
The action represented another step by the Fed to deal with a serious credit crunch stemming from the tightening of bank lending standards in the wake of multibillion dollar losses from a rising tide of defaults on mortgage loans.
..."
I would not be surprised to see massive opposition to this from the financial industry. The problem is that any adjustment of the loan amount means an immediate adjustment to the value of the loan. Financial institutions would much, much prefer to keep the loan on the books at face value, even if it's not performing. Once it's adjusted in court, that's an immediate hit to the bottom line (even if it may be in the lender's best interest long-term.)
And as noted above, this will only increase the inclination of lenders to get out of the business of making home loans. Not too long before Fannie and Freddie will be the only games in town in some parts of the country.
Whoops, Anon 9:37 beat me to it. Sorry for the repeat folks.
the credit card lobby will figure out a way to eliminate some mtg debt so there will be more to pay them.
I don't see how they can do that.
The "crammed down" portion of the mortgage is simply declared to be unsecured debt. It is stripped off the mortgage and tossed into the big "unsecured debt" bucket with the credit card bills to be repaid (at least in part) during the payment plan. That dilutes what the CC creditors get.
The underlying principle here is, exactly, secured versus unsecured. In other words, just slapping a lien on some piece of property when you make a loan does not, in and of itself, make that loan "secured." It is "secured" only to the extent that the value of the collateral is equal to or greater than the loan amount.
The 125% lenders learned this the hard way. Now it's time for people who made loans that look secured only because they played appraisal games to come to Jesus. So you thought you were secured because your LTV was officially 100% or less? That doesn't mean squat if your "V" part was a fantasy.
I think focussing on borrowers here is sort of beside the point. This is about the appraisal inflation problem coming home to roost.
When we posted on the WaMu/eAppraiseIT Cuomo suit flap, a bunch of people kept asking, why would a lender want inflated appraisals? What's in it for them?
Well, besides just wanting to keep the volume machine going, what's in it for them is they can tell a judge that their loan is "secured" and therefore ahead of the credit card people.
Worker: Yep. Of course, this doesn't apply to loans going forward (or at least not yet), but existing people in houses that are way too much for what they can afford now have every incentive to kill its appraisal value. Back to paying inner-city mothers to push baby carriages around the neighborhood.
Write off credit card debt and get the loan on the five-bedroom McMansion down to what you'd be paying if you lived in a two-bedroom 50's era home. Win-win!
I like this as well, although what I don't like about it is that the banks that too the risk have sold the mortgages in bonds, and many who have bought these things just did not appreciate the risk involved.
What is really unfortunate as well is that these losses are simply being transferred to other's pension plans, etc., none of whom deserve to be penalized. These things only ended up in pension plans because of the AAA ratings. Banks would not have been able to sell them to unsuspecting investors had the ratings been even marginally realistic.
We do need a law like this for all debt, because clearly without law we all pay for it, but we also need a law that the banks are liable for debt that they have sold that breaks the buck for all AAA rated bonds. So say the investor gets 6% the first two years and then big problem and it loses 20%. The investor gets the principal back, so loses the 12.36% gain of the first two years and the bank is on the hook for the other 7.64%. This would force banks to be considering at least a 5 year window in their lending practices, and their consequences of loans with increasing interest rates.
At the very least, let's create some equity participation warrants that give a portion of any upside to the lenders here.
Hang on there.
Nothing stops lenders from doing a voluntary workout before it gets to BK. That can involve taking back a second lien (no interest, no payments) for the "forgiven" amount. That means that if the home is sold at some point in the future at a gain, the title can't convey until the lender is satisfied.
Nothing stops this except that lenders won't play ball. If you make it go in front of a judge in a Chapter 13, all you'll get is a 3-5 year partial repayment of your "forgiven" amount.
So the ability of judges to cram down does, in fact, provide incentives for lenders to start negotiating before it gets there. I have problems with expecting BK judges to protect lender interests (with things like an "appreciation warrant") when the lenders wouldn't accept that themselves.
Look, lenders are playing chicken here. Well, sometimes you lose doing that.
I have to ask:
is the idea of securitization dying?
when it worked, it worked well.
now it's not working.
people are frantic, and there's no question that this will drag out for a LONNGGGGG time.
it would seem that there will be less demand going forward for these types of deals...
obviously, in a generation (10-20 years) we may see this beast again... but it just seems as though this beast has been roasted, no matter what the govt may try to do.
thoughts?
This is the first of several in the interventionist shell game that will play out.
As Fannie and Freddie get hit with losses to bail-out current underwater mortgage holders, they will increase costs to new buyers.
Prices get propped up somewhat (by reducing supply), but homes are still unaffordable due to the surcharge new homeowners will pay to bail out the "cram down" winners and the high prices (decreasing demand)
Mission accomplished- Japan style 10 year slow drip deflationary recession. But at least we kept the speculators from being foreclosed on.
Tanta, with Ch.13 only being extended to 5 year repayment plans for unsecured debt (not including taxes owed or student debt, which can extend plans beyond 5 years), the banks will likely only get pennies on the dollar. That's a big cramdown. I'm surprised there isn't more discussion by the lenders of extending the time period.
Something else that folks here may want to know is that the Ch.13 plans require the debtor to make out strict budgets, which the trustee for the bk court will negotiate pretty firmly on, so that all income above basic needs will flow into the plan. If the debtor has any income hiccups, he must go back to bk court. Most ch.13 debtors do not successfully conclude their plans.
BTW, Uncle Sam is first in line after secured creditors and before the unsecured, so the tax on the cramdown gift is likely to be so large in most of these cases (e.g., 30% or more cramdown when we get to the bottom?) that the unsecured creditors will be lucky to get even a penny.
Just some observations.
I love the argument that doing anything will "only delay the inevitable". What do you think life is? We delay the inevitable for 70, 80, 90 years and then we die. Get used to it, already!
Tanta,
I think your ideas for changing bankruptcy law are sublime excellent and worth any unintended consequences because as you say the most likely outcome is more careful mortgage writing of original terms. In the spirit of one good law deserves another however I think we probably have to strengthen loan disclosure fees to consumers. By introducing the possibility of cram downs in BK court the incentive will be to get even more through fees upfront that are long gone by the time the cram down is executed.
Chapter 13 filings are not that common. Most people filing bankruptcy still use Chapter 7 to wipe out whatever debt they can. If this causes more people to consider Chapter 13 and try to repay their debts, that's a good thing.
It's still a long way from a bill to a law, though, if I remember that civics stuff.
"set aside excessive and often secret fees charged by unscrupulous mortgage lenders"
But if you can show reasonable doubt that you may, in fact, have scruples, then excessive fees may be charged, I assume.
"To me, cram downs are important not just as a relief measure for debtors but as a disincentive for lenders relaxing credit standards too far. If you know a judge can rewrite your mortgage, you may well write it more carefully up front."
To me cramdowns are criminal. Borrowers have a number of options to get out of their mortgage loan in most states, like mailing in the keys or agreeing to a short sale.
Recent legislation has even made it possible to have no income tax consequences when arranging a short sale(if the loan was used for aqusition)
To say that the borrower needs more protection from themselves is ludicrous. And to think this will just help curtail predatory lending is just plain obtuse. It will curtail lending period and people like Sanchez and Miller will come out of their holes later and shriek about the lack of funding options for their constituents.
"modify the principal amount of the mortgage to reflect the homes actual value"
This little goody here is enough to make risk capital run for other hills...
"I think your ideas for changing bankruptcy law are sublime excellent and worth any unintended consequences because as you say the most likely outcome is more careful mortgage writing of original terms."
Again, anyone who knows how bankruptcy works would not share this opinion.
Right, like, credit card lenders raising lowering fees and rates because they can now prudently underwrite?
By the way, where are all these predatory loans? They should be all rescinded according to state and federal law. Where are all the recissions? Don't need bankruptcy court for that.
Truth is most of these loans were written within the state and federal limits. So anyone advocating mortgage underwriting standards via BK court is really ignorant of how things work.
"Nothing stops lenders from doing a voluntary workout before it gets to BK. That can involve taking back a second lien (no interest, no payments) for the "forgiven" amount. That means that if the home is sold at some point in the future at a gain, the title can't convey until the lender is satisfied."
Give me a break. Most borrowers will get there $595 BK attorney out of the Pennysaver and go file. They are not going to go through any hoops with the lender.
And the Lender does not have any requirement to work out anything with a deadbeat borrower who cashed out a ton of equity to buy cars and boats to just renig on their contract.
RC: ...the most likely outcome is more careful mortgage writing of original terms."
REBanker: Again, anyone who knows how bankruptcy works would not share this opinion.
Howsoever bankruptcy court "works" is irrelevant to this aspect. The prospect of a cram down will influence underwriting behavior in such a way as to avoid bankruptcy proceedings. IOW a new level of risk introduced will result in less risky behavior on the part of lenders.
Is it just me, or does it look like things are falling apart at an ever-accelerating rate? Fed taking practically "anything" in return for money loans, bizzare bills proposed in CONgress, borrowing money from everyone to keep the game going... meanwhile, the billions and billions of dollars of write-offs and losses continue. Good thing inflation is contained - oops, it's not!
Interesting times, indeed.
REBanker, cramdowns are a fact of life in bankruptcy proceedings. This bill would just eliminate an exception for certain mortgages.
However it might affect underwriting standards, not to mention appraisals, is beside the point. The point is that lenders will have to appear in Chapter 13s and at least communicate with the borrower. That will lead to deals being struck that spread or minimize the pain, or both. As it stands today, the lender has no incentive to do anything at all.
Creditors will continue to have a lot of influence on debtors' repayment plans. That won't change.
" Further empowering BK judges is unneeded. "
The point to eliminate the possibility of this issue re-occurring.
You know, just like Glass-Steagall.
Knee-jerk change? Um, no. This instills a check-and-balance into the system. Don't like the fact that you can't buy your way out of all troubles?
Solution: Don't write stupid loans.
To me, cram downs are important not just as a relief measure for debtors but as a disincentive for lenders relaxing credit standards too far.
Considering the massive write downs on MBS & CDOs that hedge funds and investment banks are taking, they are already have a ton of incentive on credit standards.
The problem is that originators that do the underwriting know they aren't going to be holding the mortgage long enough for their underwriting practices to matter. This is a classic moral hazard problem and increasing the penalty to the investor at the end of the chain doesn't fix the problem the incentives favor aggressive underwriting.
"The prospect of a cram down will influence underwriting behavior in such a way as to avoid bankruptcy proceedings. IOW a new level of risk introduced will result in less risky behavior on the part of lenders."
Are you serious? Then why are there BKs at all. Other creditors get crammed and that certainly has not stemmed the tide of filings.
You do not understand how BK works.