I find the changes dicussed to be troubling. Not because of the mess the system is in now but 5 years from now when banking standards are back in place. The increase risk that the FIs would see under all mortgages would increase so all borrowers would need to be charged an additional premium, likely in the form of higher rates. Is the intent truly to make home ownership more costly for everyone, because that is what it will do in the end?
[I'm not convinced that 600,000 families are going to flock to Chapter 13 if the bill passes and end up financially better off and still in possession of their homes as a result.}
Nor am I. Look at the already piss-poor success rate of the Ch 13 system- The overwhelming majority FAIL.
This would simply enlarge a system of institutionalized fraud.
Furthermore, I deal with bankruptcy "roadkill" all the time and the horror stories of misappropriated funds, legal malpractice, etc., are on a level that's par with the stories of predatory lending.
Wow...the scary thing is that our government will continue to step into other areas of our lives that we thought were "off limits". Shows how far the screams from the "financially irresponsible" rabble can go. Big brother is getting bigger.
At some point the whole industry is going to accept the fact that home prices for many areas simply have to come down 20-50%. I would love to see some of those truly remarkable "models" all the smart banks use with a price loss that high plugged in. That would be a good guestimate of losses.
There are such vast amounts of REO accumulating at lenders that I'm confused why cramdowns are thought to some how be bigger and scarier. What effect does a cramdown have on an MBS/CDO? Is it substantially different from foreclosing and reselling for less than was owed?
BK proceedings has not worked out well for us, and if it takes the threat of cram-downs to sober everyone up on credit standards and pricing, then let's get on with it. At the very least we ought to be able to force the MBA to come clean on its rhetoric.
BTW,Obam has come out in support of this bill.As far as the MBA isn't it about time they realized the game is over?And that things are changing quickly,in unpredictable ways?
The increase risk that the FIs would see under all mortgages would increase so all borrowers would need to be charged an additional premium, likely in the form of higher rates.
But my point, you see, is that there's no particular reason to believe that credit has to be rationed with price if we are rationing it with standards.
You evoke a world in which we go back to requiring down payments, reasonable ratios, and documented income, yet we then also add 150 bps to the loan rate on the theory that these newly conservative loans would perform just like the old go-go loans with no money down and no verified income.
Forgive me, but that's bunk. I just posted a link to Freddie's new pricing changes. They do not apply to loans with less than 80% CLTV. And while we're at it, a 1.50% rate add-on would be the equivalent of around 450 bps in post-settlement fees. Freddie's latest increase was 30 bps. This 1.50% rate figure is so enormous that it just demands justification. MBA needs to show its work.
Your credit costs are not going to go up because someone else's loan got crammed down, but stay the same because someone else's loan got foreclosed and the lender took the hit that way. We are not looking at a choice between cram-downs and no loss at all.
What effect does a cramdown have on an MBS/CDO? Is it substantially different from foreclosing and reselling for less than was owed?
It really can't be. I mean, we have the O-T-effing-S talking about principal reduction/short refis. That tells you what the regulators think the losses in FC would be.
The MBA is just in serious denial about the alternatives. Plus, they're just reflexively opposed to any regulation, and allergic to BK judges, whom they believe are not "on their side."
But my point, you see, is that there's no particular reason to believe that credit has to be rationed with price if we are rationing it with standards.
All "standards" are going to do is reduce supply, and the price of credit will go up to relect that reduced supply, unless demand for credit falls even more. If demand falls that much, the standards don't really matter.
As you've pointed out, repeatedly and skillfully, many, and probably most, of these seriously underwater loans are going to end up with the lenders writing off the excess balance - or considerably more in the case of foreclosure. How isn't yet decided but the final outcome is clear. Having at least some of these writeoffs be done by a bankruptcy judge familiar with various techniques for cheating and aware of the specific situation of the borrower is a far better method than a bureaucratic and highly abusable negative equity system. Likewise, if the borrower is able to afford the house at a more reasonable valuation, it beats foreclosure for all concerned.
In addition, if borrowers have to file chapter 13 to get the cramdown nobody's going to waltz off with thousands in liquid assets obtained by HELOC abuse or whatever. The bankruptcy judge will require those assets be returned to the lender, to the extent that it's possible. There's an issue with deeply underwater borrowers whose checks are not yet bouncing not being allowed to to BK but that can be solved by allowing BK for individuals whose debts vastly exceeds their assets (i.e. an insolvency bankruptcy)
So it looks like we could make huge strides to straightening this mess out with two steps:
1) Treat mortgage loans the same as other secured loans, i.e. allow cramdowns.
2) Treat individuals the same as companies, i.e. allow individual bankruptcies for insolvency.
Major progress to fairness and an honest resolution of the crisis through simple and equitable laws. Wow, who'd have thunk it? Fairness through fair law? Amazing - or just common sense?
Sorry Tanta, I mis-read your sentence. The standards are ultimately going to be enforced by whoever buys the securities. The MBA knows this, but tightening standards makes them look bad whereas price-fixing seems more palatable to populists.
"The Courant showed that just 25 homeowners had qualified for the $50 million program, out of more than 1,000 who had made inquiries since the program began in December."
Ooops, that would be problematic because ...
"The program uses essentially the same lending standards as banks in the private mortgage market, with one exception: Borrowers can qualify if they are behind on their mortgage payments, but only if they are behind because of sharply rising rates. They still must meet all of the income and home-equity requirements, and have strong credit."
Oh, you mean I have to PROVE I make what I say I make.
"The housing finance authority did not return a telephone call Thursday seeking comment on how the program is being altered."
Perhaps because they have no freakin' idea what to do next?
I think the real issue is that BK judges have a lot of power - it is expensive and next to impossible to sucessfully appeal their valuation. Cramdowns, if done reasonably aren't the problem, it's arguably 'activist' or 'rogue' judges, like that d00d in the Anna Nichole Smith probate hearing.
Back in my consumer lending days, cramdowns happened with regularity on auto loans. Truth be told, I would rather get crammed down most of the time, since:
A) The vehicle would only bring in that amount or less at auction anyway plus it saves time and expense.
B) If the borrower did default on the crammed-dowm balance later, it was non-dischargable.
The only real risk is that you might get 'overly' crammed by some cowboy judge, and if that happens, there wasn't anything you could really do about it.
Is there something wrong with making loans to people who can pay them back? It's become obvious that making loans to anyone who can fog a mirror isn't working out so well.
Once again, Tanta, Mucho Kodos for explaining the forest for the trees.
Tanta: Freddie's latest increase was 30 bps. This 1.50% rate figure is so enormous that it just demands justification.
Isn't it just possible that the MBA is pricing the losses for all the alphabet-soup they're going to have to eat for the greed of the last umpteen years?
Rates and downpayment terms would no doubt vary among lenders, but it is very clear that it would be difficult for borrowers to get high loan-to-value (LTV) loans. The reason for this result is that if a lender is exposed to 95 percent of a propertys value and a sizeable amount is forgiven, the lender cannot recoup that money. In addition to higher downpayments, we estimate, based on current pricing for mortgages on investment properties, that a borrower is likely to pay one to three points on the entire loan amount, depending on the size of the downpayment, and an additional 3/8 of a percent in mortgage interest rate. To explain this in terms of pure interest rate (versus a combination of rate and points/fees), we estimate that borrowers would see a 200 basis point jump in interest rates with a 5-10 percent downpayment home mortgage, with no points or fees at closing.
I recall that the most recent bankruptcy reforms (making it more difficult for individuals to file Chapter 7 and thereby discharge unsecured (i.e., credit card) debt) was passed largely on the argument that good borrowers were effectively subsidizing those who were filing Chapter 7. In other words, interest rates were higher on all consumer debts because a few borrowers could legally discharge such debts. But, in fact, the new law had no effect whatsoever on credit card interest rates. This seeems to be the same argument all over again.
As for how many actual filings this would generate, I believe that what would happen is that most out of court restructurings/workouts would model the likely result in a bankruptcy, with a slightly higher return to the lenders out of court as the borrower would be avoiding the bankruptcy stigma (and cost). An analogy would be that most contract disputes are not actually litigated in court; however, they are resolved by the parties (their lawyers, really) analyzing what would be the likely outcome in court and just cutting to that result without the cost, delay, and stress of the actual litigation.
The OTS proposal is a hybrid, which doesn't really constitute "lien-stripping" in the strict sense. However, I don't really see that it would be all that attractive to the borrowers. Sure, their mortgage principal would drop to the value of the home, and thus more borrowers would be able to service the debt. But the junior lien ('certificate') would effectively mean that the borrower would simply be renting the property until it returned to the original price, which would likely take years. If you really wanted to induce folks to do this, you'd give the borrower some percentage of the upside over the stripped-down value (i.e., there would be an "equity kicker" for both lender and borrower). Interestingly, the OTS suggestion has an analogue in Chapter 11 known as the "1111(b) election," which is too complicated and convoluted to discuss here (even most BK lawyers' eyes glaze when they hear the phrase...) but has similar features.
In the end, I've come to think that this kind of bankruptcy reform makes sense but the heat and passion it generates is so disproportionate that it's more trouble and distraction than the benefit it provides. However, I think if Tanta's analysis could be presented, say at a congressional hearing, then it might pass. Of course, she woudl have to testify via speakerphone, with voice distortion
"Is there something wrong with making loans to people who can pay them back? It's become obvious that making loans to anyone who can fog a mirror isn't working out so well"
i thought this was the root of the system.. getting someone else money at all cost..
With respect to the comments about the cost of borrowing going up. At some level it has too - that's I believe, the underlying message of many of Tanta's postings - responsible lending takes time and effort, and that has to be paid for in the form of old and grizzled loan officers sitting around, and snarling all the younger ones into shape.
At another level, it doesn't matter. To a statistical approximation, the majority of people pay the maximum they can afford for housing, and historically, that was 3-3.5* income. That determined the price of houses. Increase that multiple, and 'all' that happened was the price of houses went up. With allowances for latency adjustments within the system, at the end of the day, most people still bought the same houses, they just paid more for them.
So if it costs more to borrow, house prices will adjust downwards even more, which is yet another of the systemic feedback loops the industry is fighting here.
Overall the system works just fine - Wall Street forgot to read the chapter on how it self-heals though.
How about if you can't pay your mortgage, you lose your home. If you lent out money to people who can't pay you back, you lose your money. If you bought stocks on banks who go belly up, you lose money. If you depended on monolines to insure you and they go belly up, you lose money. IF YOU MADE A BAD DECISION, YOU LOSE MONEY!!!!!
Why don't we just let the chips fall where they may. Nobody put a gun to people's heads when they made their decisions. Aren't we all adults. Life is tough sometimes.
If it would have all worked out fine, nobody would be bailing my ass out because I was dumb, sold my properties and went into cash. Nobody would be making up the difference to me for all the lost opportunity I didn't take advantage of. Nobody would be buying me the flat screen TV's, the fancy cars, the fancy jewelry I missed out on by being smart with my money.
I'm sorry, call me old fashion. Everybody should grow up and take their medicine. Learn from this, as I did from the internet bubble. Nobody bailed my ass out when I lost close to 30% of my portfolio. I learned and I moved on.
If I sound a little bitter, I am. Enough already with trying to help the bad decision makers. They took a gamble underwritten by their greed. Thinking they would make a fortune in appreciation by buying a house they couldn't afford. Life is tough when you make a bad decision!
It has become so un-American to be forced to face the consequences of your own poor decisions. Cruel and inhumane --- home buyers shouldn't have to face that, and neither should banks. Somebody should just give money to both of them.
In addition to higher downpayments, we estimate, based on current pricing for mortgages on investment properties, that a borrower is likely to pay one to three points on the entire loan amount
OH FOR CHRIST'S SAKE.
So this is MBA logic: investment properties can currently be crammed down. If we changed that so that primary residences could be crammed down, we would end up pricing primary residences the same way we price investment properties. Because, um, every principal residence would then have the same probability of default or BK as every investment property. Because, um, you see, er, . . .
"Back in my consumer lending days, cramdowns happened with regularity on auto loans. Truth be told, I would rather get crammed down most of the time, since:
A) The vehicle would only bring in that amount or less at auction anyway plus it saves time and expense.
B) If the borrower did default on the crammed-dowm balance later, it was non-dischargable."
Think of someone with a lot of student loans who then gets a non-dischargable mortgage.
And remember that these are people who have a track record for bad financial decisions.
This just makes me so cross. Respectfully Tanta, I disagree. You are condoning a bailout. It's just plain wrong and it's not fair to people who saved and sacrificed and own their homes by being responsible. Let the people facing foreclosure be foreclosed upon or mail in their keys. Let the banks then take ownership of millions of homes which they can bulldoze and write off to zero. Let the banks take their losses like grown ups rather than screaming for bailouts like four year olds ("whocoodanode?! whocoodanode?!"). Throw a few bank CEOs in jail, Enron style. Maybe then we can all move back to where people scrimp and save for years for a 20% downpayment.
A pox on both your houses. That is both borrowers and lenders were equally greedy and wanted zipperless wealth.Well the cramdown is going to happen and society as a whole will be forced to pay for this greed.
From what I read on this blog, recovery from BK is is less painful say then genital herpes.
The borrowers seem to fall mostly into two camps. First the sociopathic second those incompetent to handle their own finances. In either case they are a menace to society.
I suggest that as part of the cramdown deal that the borrowers go into credit parole, where a trustee would have to approve the accrual of any debt for say five years
No, I'm condoning bankruptcy as a socially and economically necessary part of how the American economy works. If you're just anti-BK on principle, I can't convince you otherwise.
However, the historical rationale for exempting mortgages on principal residences from modification in BK--no other secured debt is so exempt--was that mortgage lenders provide a necessary and viable public service. They should therefore be shielded from the worst effects of borrower BK.
Are you going to tell me that idea isn't laughable at the moment?
Let the banks then take ownership of millions of homes which they can bulldoze and write off to zero.
Unfortunately, sterlingerl, that would take down everyone else with them. I'm sure that's not what you have in mind. Sometimes you have to save some that don't deserve to be saving in order to save more in a bad situation. That's not going to help anything.
The answer to the housing problem, again, is to clear the mess and get the market moving again, which will in turn clear the housing inventory and start the market moving again. We can't clear the mess in a short time, however, because the write-downs would be catastrophic and we risk total systemic meltdown.
So I wonder how to skate through this, buying time to mark things down, trying to slow down the price depreciation on houses, and trying to unstick the credit markets. Oh and all the while trying not to send inflation through the roof, or causing a Japan-sytle deflation. All I can say is I'm glad I'm not a Fed governor at this point...yeesh. I'd be pouring scotch on my cheerios.
Yeah, at the end of the day, there simply won't be a large number of borrowers 100k or more underwater on their home loans because either they'll jingle mail their keys or wait for the Sherrif. The questions are: is it worthwhile trying to keep them in their homes by lowering the principle owed, and how will this be reflected in their credit history?
I'd bet that for a very large proportion of borrowers, there is a principle reduction and loan terms that you could offer them that would result in lower losses than a foreclosure and REO sale. But the thing about REO and sale is that at the end of the day, the market price of the home is found in an arms length transaction. Even if the bank looses a little by auctioning rather than using a RE agent, the market has spoken. The problem with cramdowns or the FHA plan is that without any actual sale, you're relying on an appraisal to avoid excessive writedowns of principal. I see no particular reason to believe that the appraisal process has suddenly improved since 2005.
As for how this is reflected on the borrowers credit record, that's really not an issue IMHO. 5-10 years from now, lenders will decide how they decide to regard people who overbought and then got out from under their house in the next couple of years. To think that it will be of primary interest to them whether it is tagged as a foreclosure, or a bankrupcy, or a Shiny Happy Government Plan, assumes that they will be sadder but no wiser after their losses, which seems unlikely to me. Their pricing and rationing of credit in the future will be determined by how much money they have and what the pool of potential borrowers looks like. There really is no difference between whether 60% of them have foreclosures or whether 60% of them have bankrupcies with cramdowns or whether 60% signed up for some other relief program. They'll serve the other 40% first with reasonable rates and then look at those 60%.
[I suggest that as part of the cramdown deal that the borrowers go into credit parole, where a trustee would have to approve the accrual of any debt for say five years]
Good news for you: that's part and parcel of the 13 system already.
However, don't be fooled into thinking that a moratorium on new debt is a cure-all. The Chapter 13 system is no more about rehabilitiation than our prison system.
Borrowers don't come out the other side healed or educated. In fact, since most of the money has been managed by others for a number of years, they finish their tour of duty with even less financial skill than they walked in with.
The discussion on cram downs has a quality of observing something the wrong way through the telescope. It doesn't seem like a proposal to save the banking system; it seems like a change to allow bankruptcy judges one other tool to deal with the cases in front of them. We can hope that overall, whether or not they wear black fishnet stockings in their off hours like some Bush appointees in Boston, they will for the most part handle their power responsibly. Without numbers, the world of home lending should consider the change to be nothing more than weak tea.
I don't care if they change the rules going forward. When you sign a contract the rules are known to both parties. Changing the rules after the ink dries is wrong.
Of course I'm sure that cram downs couldn't occur after the 70's law (I'd love to know the name so I could read it) for loans made prior to it's passage.
So we get a nice bit of karma. Because the 70's housing market wasn't exactly a fun ride, if the stress my parents experienced was any indication.
The problem with cramdowns or the FHA plan is that without any actual sale, you're relying on an appraisal to avoid excessive writedowns of principal.
Well . . . I'm not so sure about that. I'd bet that a whole lot if not all of these people can bring in the documentation showing that they did list the property for at least 90 days and they did not get a single offer at or above the loan amount.
I really think you have to think about it in contrast to a short sale, not FC. In a short sale, the lender lets the property go for the best private-sale bid someone can scrape up. It has dog to do with some appraisal; it's a matter of who submits a contract offer for how much in less than six months exposure time.
If these folks are trying to short-sell because they really want or need out (couldn't afford even crammed down terms, or need to relocate or something), then just do the short sale. If they're in this because they don't think they have the option of staying, then cram it down to the same amount you'd get in a short sale bid.
2 notes on my comment above: Oops that should of course be principal, not principle. And I wasn't obvious enough with the point that without an arms length market transaction, the possibilities for fraud are rampant.
As far as banks taking their medicine, I agree in part. If the medicine is so bad that it results in death, not so much. If we have major bank failures then we get into the cascading cross defaults, total financial meltdown scenario. We need the banks as institutions to survive. However, that does not mean that the common shareholders of the banks need to survive. I have called for it many times before here, and generally gotten little response, but one of the first things that has to happen is major cuts or elimination of dividends and share repurchase programs at banks. This should be within the power of the Fed/CofC to do. Hard caps of compensation should also be imposed. A hard cap would include not just salary, but also bonus, stock options deffereed comp plans etc. Something like 250K sounds reasonable. If bank bailouts are needed, then the banks should be temporarrilly nationalized, recapitalized and then the government sell off the bank to new investors, existing common shareholders get nothing.
Tanta, but in this case you don't HAVE a short sale bid. The idea at some level is that there is some premium that people who are already living in a house and want to stay there will pay over the amount that somebody else would pay plus the transaction costs. Yes, it is easy to determine that the house is upside down, but it is difficult to determine exactly how far upside down it is, especially in a RE market dominated by foreclosures. And of course like chapter 13s and workouts, there's no gaurantee that the market won't continue to fall and you'll have to do the same thing again.
Of course I'm sure that cram downs couldn't occur after the 70's law (I'd love to know the name so I could read it) for loans made prior to it's passage.
The banks and MBS investors can take the cram down - in whatever form it comes - or they had better develop a property management department. We can all just become renters.
And of course like chapter 13s and workouts, there's no gaurantee that the market won't continue to fall and you'll have to do the same thing again.
Of course there isn't. But that would be true however you arrived at a current value of the property.
My point is simply that either a borrower can bring evidence of an attempt to sell the property, showing what the best offer was, or a BK judge can request an appraisal that uses short sales as comps (which you normally wouldn't do). Yes, it's a challenge to value properties in a declining market, but that's no reason to think it's just impossible. The judge can always add the "owner premium" in to arrive at the modified balance.
The other thing that the OTS proposal does is remove some of the incentive to get a low estimate of current value for the writedown. Otherwise if the principal loan amount comes in at less than you can sell for you sell immediately, pocket the difference and go on your merry way. The problem is that if you think prices will CONTINUE to fall, your incentive is to sell immediately. I suspect that their program would only work if it still left borrowers upside down and trapped, just not SO upside down that they would jingle mail. Hard to thread that needle.
property value increases to 325K over 5 years and borrower sells
You know, we go through this every time I post on BK.
Please. Familiarize yourself with how Ch 13 works before going off on this stuff.
Hint: in a CH 13 repayment plan, the borrower is actually making both the full crammed-down mortgage payment plus some contribution to the stripped-off debt (it gets thrown into a bucket with all the other unsecured debt). These payment plans usually last three to five years.
And of course if the principal loss is mandated by a Judge or government program, the "lender" doesn't have to worry that a workout will set them up for bondholder suits.
the historical rationale...was that mortgage lenders provide a necessary and viable public service.
I thought it also had more to do with chap13 plans run 5 years, and mortgages usually having much longer terms.
Two important concepts some of you d00dz really need warm up to:
BK SUX: Some among you seem to be forgetting that cramsdowns only occur in a BANKRUPTCY. The last time I checked, personal bankruptcies still r teh suxorZ. (plschwartz - I'll trade you a chap13 for your GH anytime.)
Life isn't fair Can we please let it go on the fairness dream here? For starters, "Fair" is a concept only rivaled in terms of subjectivity by "Beauty" - but no matter what you consider fair, there is zero chance that this all will end 'fairly'.
Some contribution to the newly-unsecured piece - like 1%. The crammed-down debt won't get repaid. These borrowers likely will have all of their "disposable income" used up by the secured portion and whatever else is in line before the stripped off piece.
But hey,
If you want to give investors one more reason to avoid the MBS markets, go for it.
But don't ignore what the consequences of that will be.
Most likely, they'll either be financially better off or still in possession of their homes, but not both.
There's the paradox. Everything we've seen so far has been an attempt to keep people in houses and carrying loans they cannot afford. It isn't about the house, it's about the debt. That means it is not about the people it is about the lenders. For some strange reason the lenders are making a fundamental error. They are assuming that as long as they can keep people in houses and paying things will work out for the lenders. The battle cry is "it is better than the alternatives." If I want cheese with my whine I'll go to Cracker Barrell... oh, wait...
the historical rationale...was that mortgage lenders provide a necessary and viable public service. Well historicly it was also rare for borrowers to be dragged down primarily by their underwater house. Most people who went bankrupt could EITHER sell or continue to make payments if relevied of other debt.
These borrowers likely will have all of their "disposable income" used up
Bad assumption. If that were the case, they wouldn't be allowed to reaffirm under any circumstances (cramdown or no cramdown). As Tanta said: "Please familiarize yourself with how Ch 13 works before going off on this stuff."
Shnaps, this is just a variant on the argument that health care insurance costs should remain prohibitive because otherwise people will go rush out and get a bunch of unnecessary medical care. You know, surgical biopsies and invasive screening tests are so damned much fun to undergo that people will demand them when they have a head cold, since they're "free." Or, the assumption is, we'll all immediately turn into chain-smoking alcoholics who do no exercise and eat nothing but bacon and eggs and cheetos because we know we can get "free" quadruple-bypass surgery.
Anyone who thinks Chapter 13 is a minor inconvenience in a life filled with windfall profits should just go file now. Enjoy yourself.
And of course, as we approach a situation in bubble markets where MOST sales ARE short sales, there would seem to be little reason to not use them in your comps. After all, when a "typically motivated," IS desprate to get out of a mortgage they can't afford, we should be looking at that price.
Interesting, but you're missing the point. Yeah, sure its a hard issue to solve, but nobody cares.
Millions of people are about to become homeless. Today. RIGHT NOW.
Throwing millions of people out on the street, i.e., messing with "The Dream" as Tanta calls it, is politically infeasible.
Bottom line: government will throw whomever they need to under a bus, and that includes the banks or anybody else, regardless of how big the bribe was, before their own survival comes into doubt. They run the courts, they enforce (keyword: FORCE) the laws, they print the currency.
In short, the game begins and ends with the government. And the MBA is utterly stupid, at this late stage, to think they are (or could make themselves) somehow bigger than the game itself.
If people are concerned with punishing the guilty and minimizing costs to the innocent, bankruptcy cramdown is the way to go. Guilty borrowers are stripped of liquid assets and get their credit slammed. Guilty lenders lose lots, and quickly. Finally, society benefits by fewer foreclosures and more homeowners who will be able to sell and move. OK, you don't get to lash foolish middle-aged homebuyers with your cat-o'-nine-tails but that wasn't going to happen anyway.
Disagreeing in that I do think bankruptcy cramdowns are fair, or at least the fairest proposal on the table at the moment.
short sales, there would seem to be little reason to not use them in your comps.
Why would you even consider not including short sales in comps? Short sales are still sales in a mutually agreed-upon arms-length transaction. So are REO sales. An appraisal is an attempt to assess the market price. If the 'market' is nothing but REOs - well too bad - it's still the market.
it's not a minor inconvenience. but seriously, don't pretend that the stripped portion will ever be paid off in full in the vast majority of cases.
the problem isn't people rushing to ch13...the problem is the reaction of the people who fund most of the mortgages. don't forget - it* will also hit Fannie and Freddie, and their limited capital positions.
it won't be a good reaction for anyone concerned.
*it: defined as immediate drop in value of MBS and whole loan holdings upon passage of bk bill (scale dependent on how bk law is written).
Owl @ 2:22 RIGHT ON! If I knew how to triple the font and make it bold I would have done that. The factor that has been missing in all this BS is personal responsibility. There are a lot of folks on this board that seem to have forgotten this aspect. If we wind up penalizing the people that made prudent choices by just giving out $400-750,000 homes to irresponsible borrowers I, for one, will be sorely tempted to put my training in Viet Nam to use. I would imagine I would not be alone.
Why would you even consider not including short sales in comps?
My point was precisely to develop an appraisal that specifically tries to arrive at the "distressed sale" value, not the "typically motivated" value that appraisals are theoretically aimed at.
It may be that most sales in your neighborhood are distressed, not "typically motivated." So that should make it easier to come up with a distressed liquidation value.
Until the rules are changed, the standard definition of a GSE-acceptable appraisal sill has "typically motivated buyer and seller" in it, does it not?
"Millions of people are about to become homeless. Today. RIGHT NOW."
Bullsh!t.
People can afford to rent. People can short sell -> get a cheaper house. There are many options. It's not like people are foreclosed upon and camp out in the woods in their backyard that night.
No one is becoming homeless - unless they lost their job or something - in which case nothing but direct cash aid can help them.
Like it or not those of us that bought properties we could afford and faithfully pay every month are going to pay regardless. We will pay for it through our 401Ks, pensions, local taxes and/or reduced local services, inflation, potential job loss, etc. We will get no government help or break on our mortgages because we are not delinquent or underwater. Stop f*ing around. Just do whatever needs to be done and do it quickly. That's all I ask.
Tanta - **I support the bill, nonetheless, because giving residential mortgage lenders preferential treatment in BK proceedings has not worked out well for us, and if it takes the threat of cram-downs to sober everyone up on credit standards and pricing, then let's get on with it. **
Excellent summary! (I've finally figured out that sometimes even when you agree with a position you have the appearance of disagreeing with it because their logic on the way to the conclusion is sooo annoying - so a nice summary at the end is helpful. But hey, the awesome sarcasm and the behind the scenes factoids are great even when I can't figure out your overall view. Seriously.)
My only issue with your rationale for the change in bankruptcy is that adding incremental problems to the financial system right now may not be the best idea in the world. ? (OTOH adding risk to consumers is probably not ideal either - but it isn't clear that the consumers in question are going to be spending a lot on the economy anyway?)
And if you want to punish crooked borrowers, bankers, brokers, buffoons, or any other b-words, set them to work demolishing vacant houses with hand tools. Then let's all move on.
OK theres a huge huge difference unless I misunderstand something.
Current BK rules for Ch 13 provide that any undercollateralization of a mortgage produces a bifurcated unsecured debt that cannot be reduced.
Example: I am a bank and I have a $300,000 mortgage on your house which is now worth $200,000. I am considered a secured creditor for $200,000 and an unsecured creditor for $100,000, but unlike any other unsecured creditors, no Ch 13 plan can force me to write down that $100,000.
Under the proposed changes (SOMEONE TELL ME IF IM WRONG) then that $100,000 "unsecured" debt can be crammed down.
Here's what I don't get.
If I (the bank) am completely taken out of the picture and get a check for, say, $225,000, I agree this is financially probably at least as good as foreclosure.
If instead I am still on the note but the principal is somehow reset to $200,000, then if the house goes back up in value eventually the homeowner gets to capture all that?
How is that not a bailout.
At least in the OTS plan the homeowner doesn't get to capture all that.
I may be wrong here AND IF A BK EXPERT CAN CORRECT ME PLS DO SO but why should I be forced to stay on the risk with any possible price recovery now transferred to the owner?
Clark, I am suggesting that the cramdown exclusion for mortgage lenders creates moral hazard for mortgage lenders. It says to mortgage lenders, don't worry about lending more than the property is worth to a borrower burdened already with too much consumer debt, because you'll still be first in line in BK.
Look, a lot of these mortgage loans in question involved people cashing out the house to pay off credit cards. They didn't do that because they're so savvy. If the debt were still unsecured CC, they could go Chapter 13, keep the home (since the mortgage wouldn't be underwater), and discharge the unsecured debt.
But some loan officer talked them into paying that unsecured debt off with mortgage money. Because the interest rate on mortgage money is cheaper. Why is it cheaper? It's secured. What if it's not really secured, because the appraisal's a joke? Too bad, you lose your house anyway.
Putting cram-downs back into the equation forces mortgage lenders to stop pretending that these very high LTV cash-outs are really "secured."
My point was precisely to develop an appraisal that specifically tries to arrive at the "distressed sale" value
sorry, I missed the earlier post. At risk of topic-creep, here's my 2 cents on that:
A distress sale value is easier said than done, as there is basically a range of situations when it comes to defining 'distressed' situations. I'm guessing tatt what the GSEs language is mostly aimed at omitting any non-arms-length deals.
I would argue there is a spectrum of what constitutes 'typical' which ebbs and flows over time. In general, it's called the market. In good times, it's a 'boom' market, in bad times, it's a 'distressed' market, but it's still the market - particularly from the potential buyer's point of view.
As a buyer in the market, I may not know that I'm dealing with a short sale situation until well after I've made an offer, if ever.
It may be that most sales in your neighborhood are distressed, not "typically motivated." So that should make it easier to come up with a distressed liquidation value.
I would argue that if most sales are distressed, than distressed in the new typical. The justification for ignoring them in the first place is that a sale by an atypically desprate homeowner is likely to be an outlier. You don't want the occasional outlier to disproportionately affect your estimate of the price that is more likely to be agreed upon by a more typical sale.
Cram downs create uncertainty as to what exactly is secured - and will cause investors to discount pricing on bonds because of this risk - and will increase interest rates to borrowers.
Under current law, a borrower in Ch 13 with a principal residence can either affirm the entire debt--at its contractual terms--and keep the house, if the borrower makes the payment during the entire repayment plan period, or the stay is lifted and the lender can FC. There is no "bifurcating" of the mortgage debt on a principal residence.
If the lender forecloses today, it will have to try to unload that REO as quickly as possible. There just isn't a way for the lender to hang onto the property for five years to take advantage of that future appreciation back to the original mortgage amount by foreclosing.
So what happens, currently, is that if the lender doesn't work things out with the borrower voluntarily, and the borrower files for BK, the lender is going to get the house back, and unload it at a distressed price, and take a loss.
Alternately, if we changed the law, the judge could in essence impose that same loss on the lender (via the cram-down), the lender would continue to earn interest on the remaining balance, and if the property appreciated in the future and the borrower continued to make payments until it was sold, the lender would get back the outstanding crammed-down principal.
Sure, you can think of that as the BK borrower "getting" the appreciation, but the alternative is for some new borrower to "get" the appreciation by buying the REO at today's distressed price.
The MBA is just trying to convince itself that if we somehow forced these borrowers to reaffirm the whole debt, the money fairies would show up and provide them with the ability to pay it for long enough to get us through the downturn, back to an environment in which we don't mind foreclosing again.
As a buyer in the market, I may not know that I'm dealing with a short sale situation until well after I've made an offer, if ever.
That I kind of doubt. What I'm hearing is that the things get originally listed at an above-mortgage price, they get no offers, the listing expires, then they relist them at a below-mortgage price with a "lender must approve" code on the listing. If you don't realize you're making an offer on a short-sale property, you're not using a realtor, I suspect.
I have several problems with this proposal. If a borrower can just file for bankruptcy and claim to be unable to pay his/her mortgage, just so some judge can reward him/her with a lower interest rate, exactly what is the point of making a loan to that borrower to begin with?
Why don't we have judges oversee every mortgage loan before they're made to begin with?
Because most borrowers wouldn't be able to qualify for a mortgage to begin with. Oh, okay, I get it.
Are we just assuming these cramdown ideas are Chap 13? I get the feeling this nec proposal is a way to force the lender into a cramdown without the borrower doing a BK.
Interesting. I will ask my Realtor about that. If the people you are hearing about are trying to sell at an non-market-clearing price, maybe they're not working with a Realtor. I guess in my own home-buying experiences, I've always been more focused on the houses themselves, rather than looking for short-sellers to put over a barrel. But I suppose there may be certain segment of buyers who do just that.
Again, if such folks are the bulk of what consitutes the 'market', then that's what's 'typical'.
What if a seller is interested in selling quickly to bring quick closure to a divorce? Would that one do in the 'distressed' pile or the 'typical' pile? I could go on and on...sorry, T - I often agree w/you, but not on this one.
Anyone who thinks Chapter 13 is a minor inconvenience in a life filled with windfall profits should just go file now.
To the crooks and entitlement artists with PhD in fraud, it isn't even a minor inconvenience.
You can not use standards for ethical and educated people when you have a population that meets and exceeds the worst racial stereotypes.
Add radical activist judges like for example in the 9th circuit court and you have chaos.
Maybe all the honest people move to Canada, eh? LOL
And of course Shorts, REOs tc don't have to be a majority until they shouuld be considered for comps. Once they're common enough that they're always available, they consitute a big enough proportion of the market that they should be averaged in IMHO.
I guess in my own home-buying experiences, I've always been more focused on the houses themselves, rather than looking for short-sellers to put over a barrel.
I'm not making any judgements about the buyer. I am simply saying that if the property is listed at a price less than the loan amount, and the borrower doesn't plan to bring cash to closing, the listing agent is obligated to disclose up front that any offer submitted will be subject to lender approval.
In other words, if you list at a price that would make you whole, the only offer you get is below mortgage, and you have to ask for a short sale, well, then you tell the buyer about the problem. In that case, you wouldn't have had a failure to disclose properly, because the property was not listed at a short sale price.
But if you have wised up, and you list your property at a short price, you have to disclose to prospective sellers that any offer will be subject to lender approval. My observation was, then, that if a prospective buyer fails to notice that the property is listed with a "lender must approve" indication, that buyer is probably not working with an agent. An agent would be able to spot that on the listing.
This was just by way of noting that you can use MLS to find, specifically, short sale listings. It won't be all houses that end up selling short, but it should be all that are listed with the intention of selling short.
Alright, this was already said once in this thread, but it need to be repeated.
Millions of people are about to become homeless. Today. RIGHT NOW.
You're full of crap, but I wonder if you even know it?
They're not becoming homeless - they're becoming RENTERS.
And they just scooted by without paying "rent" on their mortgage for the last 6-9 months, so if they have a lick of sense, it won't be any problem for them.
If I tried that, I'd be out on my ass after the landlord evicted me in less than 2 months.
So cry me a river - sell stupid somewhere else, I'm not buying it here.
Sorry to be so blunt and disrespectful, but these poor folks you're talking about did my family and my country direct measurable harm. I refuse to have sympathy for either the borrower or the lender in this mess.
The only question is what we can do to minimize the damage going forward. If it wasn't for that, I'd love to watch all involved parties burn.
My observation was, then, that if a prospective buyer fails to notice that the property is listed with a "lender must approve" indication, that buyer is probably not working with an agent.
In my area of the country (South SF Bay), it's common (shockingly common) to see "short sale, subject to lender approval" right in the MLS description text - so I suspect it's not a surprise for most people. I'd have to wonder about someone that didn't put that in their description text... and probably move on to purchase a different property. It's not like you lack for choices right now.
Glad to see so many have such tender concern for the poor, poor mortgage lenders.
Duty! Accountability! Personal responsibility! Moral fiber! The mob tearing down the pillars of capitalism! Barbarians at the gates! Aieee!
I guess it's easier to be a reflex monkey than look at what's actually going on here.
All you "pro-business" folks: what if your business happened to be, I don't know, unsecured credit card lending? Maybe you didn't even lend irresponsibly. Maybe you sent out the plastic before the hapless buyer even bought the POS house.
How would you feel then? Watching a bank elbow its way in front of you in the BK line by pretending its debt is "secured" when you all know damn well it isn't secured at all?
Would you still fear for the pillars of capitalism if somebody stopped the bank's claim from being privileged over yours?
All this talk of appraisals and fair home values is nice, but I suspect it will last about as long as it takes for a divorced mother of three to start misting up at the bankruptcy proceedings.
Do you seriously think that a judge would evict a family from their home because, after looking at a fair appraisal value and a fair market interest rate, the family still cannot afford the home?
I think you seriously underestimate the human factor. Foreclosures work because they're an ironclad rules-based machine; the judges don't have to make any personal judgement decisions, if someone's not paying it goes into foreclosure. But once you add the human element, judges are going to realize--correctly--that the intent of the new law is to keep people in their homes, and as such will become suprisingly "creative" when it comes to valuations and/or payment plans.
There may be some judges who follow the rules and end up evicting families who cannot afford their homes under any fair valuation, but that will last about as long as it takes the evicted families to write their local Congressional representation.
And at that point, we'll hear the "hoocoodanode" from people who claimed that this would all be rules-based and not open to abuse, and who denied the possibility of a moral hazard--the potential for people to continue to buy homes far more expensive than what they can afford, knowing, at some level, that the government will ensure that they keep their homes.
The burden will shift to the banks, who will review documentation ten times over (at which point Tanta will declare victory), and then will charge higher interest rates to compensate for the extra cramdowns they will still receive, even with the extra documentations (e.g., member of the family contracts severe illness->family goes delinquent on loan->sympathetic judge writes down value of loan to what they can afford.)
Robin Hood-esque punishment of the banks is all well and good, but I have yet to hear a reasonable argument that shows how the burden of all this will not fall on new borrowers.
but I have yet to hear a reasonable argument that shows how the burden of all this will not fall on new borrowers.
From a mortgage pricing standpoint, you're right in that stricter standards WILL burden new borrowers. But what those borrowers get in return is sanity in houing prices.
I love the folks who seem to think this issue is the "government getting into our business again". I was in the prime mortgage business as a Loan Officer for 5 years. My employer-bank is a mid-sized regional institution. We required 10% down on everything. Everything. No subprime. We turned away a lot of business, but that bank made plenty of profit and has no problems with real estate loans.
These lenders who are getting burned now have no one to blame but thenselves. They relaxed the standards to "fog the mirror" levels and absolutely should have known better. It will probably take the government to fix the problem and regulate lending. These greedy lenders did it all to themselves. Reality bites, huh?
I'm not too concerned about the program itself, for the reasons Tanta expounds. I am concerned about the spin.
If this is sold as "Mortgages should be treated the same as all other forms of debt, with no special protections for either the lender or the borrower," then I'm all for it. And essentially, that's what it does. As such, it is actually proposing less government interference, not more.
I have some concern that it will end up getting spun in the opposite direction, since politicians and popularity seekers will take credit for any positive effects of the act as though it added something, not just removed somebody else's unwise addition.
JBL: If this is sold as "Mortgages should be treated the same as all other forms of debt, with no special protections for either the lender or the borrower," then I'm all for it.
Treated the same as all other debt? As in, with the same interest rate as the car loan, or the loan for the furniture, or the loan for the electronics entertainment system?
Because that is what is being proposed here--removing mortgage's special protection and making them the same as other collateralized debt, subject to modifications in bankruptcy court if the buyer cannot pay. So why would the interest rates be any different from what they are for other collateralized debt, e.g. car loans or home entertainment system loans?
Because that is what is being proposed here--removing mortgage's special protection and making them the same as other collateralized debt, subject to modifications in bankruptcy court if the buyer cannot pay.
I see you know exactly as much about mortgages as you do about bankruptcy court.
"So why would the interest rates be any different from what they are for other collateralized debt...?"
Because of intrinsic financial characteristics like the nature of the collateral, and not because of artificially legislated distinctions.
"Like other loans" doesn't refer to the individually negotiated loan terms, it refers to the general legal framework. No one is suggesting that judges would arbitrarily modify interest rates any more than they would arbitrarily shorten home loans to a five-year amortization.
You and I are saying the same thing, that is (and what I meant) that if the law is changed then an undercollateralized morgate lender will EXACTLY be bifurcated into its secured portion and unsecured portion and the unsecured portion crammed down, written off, converted, whatever unless they agree to a novation.
Why can't instead the new law be that the mortgage lender's loan is reformed automatically into a negative amortization loan?
For that matter, in all the bailout proposals (feh), why can't the new mortgage be a negative am mortgage instead of OTS "certificates" ???
Is there some prohibition against insuring a negative am mortgage, even if for a capped or fixed amount?
I find the changes dicussed to be troubling. Not because of the mess the system is in now but 5 years from now when banking standards are back in place. The increase risk that the FIs would see under all mortgages would increase so all borrowers would need to be charged an additional premium, likely in the form of higher rates. Is the intent truly to make home ownership more costly for everyone, because that is what it will do in the end?
[I'm not convinced that 600,000 families are going to flock to Chapter 13 if the bill passes and end up financially better off and still in possession of their homes as a result.}
Nor am I. Look at the already piss-poor success rate of the Ch 13 system- The overwhelming majority FAIL.
This would simply enlarge a system of institutionalized fraud.
Furthermore, I deal with bankruptcy "roadkill" all the time and the horror stories of misappropriated funds, legal malpractice, etc., are on a level that's par with the stories of predatory lending.
Wow...the scary thing is that our government will continue to step into other areas of our lives that we thought were "off limits". Shows how far the screams from the "financially irresponsible" rabble can go. Big brother is getting bigger.
At some point the whole industry is going to accept the fact that home prices for many areas simply have to come down 20-50%. I would love to see some of those truly remarkable "models" all the smart banks use with a price loss that high plugged in. That would be a good guestimate of losses.
There are such vast amounts of REO accumulating at lenders that I'm confused why cramdowns are thought to some how be bigger and scarier. What effect does a cramdown have on an MBS/CDO? Is it substantially different from foreclosing and reselling for less than was owed?
If you put the pig in a poke, how can the buyer see the lipstick?
BK proceedings has not worked out well for us, and if it takes the threat of cram-downs to sober everyone up on credit standards and pricing, then let's get on with it. At the very least we ought to be able to force the MBA to come clean on its rhetoric.
Good point!!
how will this affect the trust in the system???
you are largely financed with foreign money.. so wich impact would this have??
btw great site to learn....
BTW,Obam has come out in support of this bill.As far as the MBA isn't it about time they realized the game is over?And that things are changing quickly,in unpredictable ways?
The increase risk that the FIs would see under all mortgages would increase so all borrowers would need to be charged an additional premium, likely in the form of higher rates.
But my point, you see, is that there's no particular reason to believe that credit has to be rationed with price if we are rationing it with standards.
You evoke a world in which we go back to requiring down payments, reasonable ratios, and documented income, yet we then also add 150 bps to the loan rate on the theory that these newly conservative loans would perform just like the old go-go loans with no money down and no verified income.
Forgive me, but that's bunk. I just posted a link to Freddie's new pricing changes. They do not apply to loans with less than 80% CLTV. And while we're at it, a 1.50% rate add-on would be the equivalent of around 450 bps in post-settlement fees. Freddie's latest increase was 30 bps. This 1.50% rate figure is so enormous that it just demands justification. MBA needs to show its work.
Your credit costs are not going to go up because someone else's loan got crammed down, but stay the same because someone else's loan got foreclosed and the lender took the hit that way. We are not looking at a choice between cram-downs and no loss at all.
This 1.50% rate figure is so enormous that it just demands justification. MBA needs to show its work.
yes, i would like to see that.
What effect does a cramdown have on an MBS/CDO? Is it substantially different from foreclosing and reselling for less than was owed?
It really can't be. I mean, we have the O-T-effing-S talking about principal reduction/short refis. That tells you what the regulators think the losses in FC would be.
The MBA is just in serious denial about the alternatives. Plus, they're just reflexively opposed to any regulation, and allergic to BK judges, whom they believe are not "on their side."
But my point, you see, is that there's no particular reason to believe that credit has to be rationed with price if we are rationing it with standards.
All "standards" are going to do is reduce supply, and the price of credit will go up to relect that reduced supply, unless demand for credit falls even more. If demand falls that much, the standards don't really matter.
As you've pointed out, repeatedly and skillfully, many, and probably most, of these seriously underwater loans are going to end up with the lenders writing off the excess balance - or considerably more in the case of foreclosure. How isn't yet decided but the final outcome is clear. Having at least some of these writeoffs be done by a bankruptcy judge familiar with various techniques for cheating and aware of the specific situation of the borrower is a far better method than a bureaucratic and highly abusable negative equity system. Likewise, if the borrower is able to afford the house at a more reasonable valuation, it beats foreclosure for all concerned.
In addition, if borrowers have to file chapter 13 to get the cramdown nobody's going to waltz off with thousands in liquid assets obtained by HELOC abuse or whatever. The bankruptcy judge will require those assets be returned to the lender, to the extent that it's possible. There's an issue with deeply underwater borrowers whose checks are not yet bouncing not being allowed to to BK but that can be solved by allowing BK for individuals whose debts vastly exceeds their assets (i.e. an insolvency bankruptcy)
So it looks like we could make huge strides to straightening this mess out with two steps:
1) Treat mortgage loans the same as other secured loans, i.e. allow cramdowns.
2) Treat individuals the same as companies, i.e. allow individual bankruptcies for insolvency.
Major progress to fairness and an honest resolution of the crisis through simple and equitable laws. Wow, who'd have thunk it? Fairness through fair law? Amazing - or just common sense?
"This 1.50% rate figure is so enormous that it just demands justification. MBA needs to show its work."
my uneducated guess is this is the number they need to make a juicy profit.....
Sorry Tanta, I mis-read your sentence. The standards are ultimately going to be enforced by whoever buys the securities. The MBA knows this, but tightening standards makes them look bad whereas price-fixing seems more palatable to populists.
I almost spit my coffee this morning over this one:
Mortgage Program May Expand
Real Estate Buyers : Real Estate Buyers News and Photos - South Florida Sun-Sentinel.com
"The Courant showed that just 25 homeowners had qualified for the $50 million program, out of more than 1,000 who had made inquiries since the program began in December."
Ooops, that would be problematic because ...
"The program uses essentially the same lending standards as banks in the private mortgage market, with one exception: Borrowers can qualify if they are behind on their mortgage payments, but only if they are behind because of sharply rising rates. They still must meet all of the income and home-equity requirements, and have strong credit."
Oh, you mean I have to PROVE I make what I say I make.
"The housing finance authority did not return a telephone call Thursday seeking comment on how the program is being altered."
Perhaps because they have no freakin' idea what to do next?
Cramdowns are a great idea.
Basic business contract law and tenents mean nothing anymore so let's party on.
I think the real issue is that BK judges have a lot of power - it is expensive and next to impossible to sucessfully appeal their valuation. Cramdowns, if done reasonably aren't the problem, it's arguably 'activist' or 'rogue' judges, like that d00d in the Anna Nichole Smith probate hearing.
Back in my consumer lending days, cramdowns happened with regularity on auto loans. Truth be told, I would rather get crammed down most of the time, since:
A) The vehicle would only bring in that amount or less at auction anyway plus it saves time and expense.
B) If the borrower did default on the crammed-dowm balance later, it was non-dischargable.
The only real risk is that you might get 'overly' crammed by some cowboy judge, and if that happens, there wasn't anything you could really do about it.
Is there something wrong with making loans to people who can pay them back? It's become obvious that making loans to anyone who can fog a mirror isn't working out so well.
Once again, Tanta, Mucho Kodos for explaining the forest for the trees.
Tanta: Freddie's latest increase was 30 bps. This 1.50% rate figure is so enormous that it just demands justification.
Isn't it just possible that the MBA is pricing the losses for all the alphabet-soup they're going to have to eat for the greed of the last umpteen years?
Rates and downpayment terms would no doubt vary among lenders, but it is very clear that it would be difficult for borrowers to get high loan-to-value (LTV) loans. The reason for this result is that if a lender is exposed to 95 percent of a propertys value and a sizeable amount is forgiven, the lender cannot recoup that money. In addition to higher downpayments, we estimate, based on current pricing for mortgages on investment properties, that a borrower is likely to pay one to three points on the entire loan amount, depending on the size of the downpayment, and an additional 3/8 of a percent in mortgage interest rate. To explain this in terms of pure interest rate (versus a combination of rate and points/fees), we estimate that borrowers would see a 200 basis point jump in interest rates with a 5-10 percent downpayment home mortgage, with no points or fees at closing.
http://www.mortgagebankers.org/files/StoptheBankruptcyCramDown/StatementofDavidKittle.pdf
I recall that the most recent bankruptcy reforms (making it more difficult for individuals to file Chapter 7 and thereby discharge unsecured (i.e., credit card) debt) was passed largely on the argument that good borrowers were effectively subsidizing those who were filing Chapter 7. In other words, interest rates were higher on all consumer debts because a few borrowers could legally discharge such debts. But, in fact, the new law had no effect whatsoever on credit card interest rates. This seeems to be the same argument all over again.
As for how many actual filings this would generate, I believe that what would happen is that most out of court restructurings/workouts would model the likely result in a bankruptcy, with a slightly higher return to the lenders out of court as the borrower would be avoiding the bankruptcy stigma (and cost). An analogy would be that most contract disputes are not actually litigated in court; however, they are resolved by the parties (their lawyers, really) analyzing what would be the likely outcome in court and just cutting to that result without the cost, delay, and stress of the actual litigation.
The OTS proposal is a hybrid, which doesn't really constitute "lien-stripping" in the strict sense. However, I don't really see that it would be all that attractive to the borrowers. Sure, their mortgage principal would drop to the value of the home, and thus more borrowers would be able to service the debt. But the junior lien ('certificate') would effectively mean that the borrower would simply be renting the property until it returned to the original price, which would likely take years. If you really wanted to induce folks to do this, you'd give the borrower some percentage of the upside over the stripped-down value (i.e., there would be an "equity kicker" for both lender and borrower). Interestingly, the OTS suggestion has an analogue in Chapter 11 known as the "1111(b) election," which is too complicated and convoluted to discuss here (even most BK lawyers' eyes glaze when they hear the phrase...) but has similar features.
In the end, I've come to think that this kind of bankruptcy reform makes sense but the heat and passion it generates is so disproportionate that it's more trouble and distraction than the benefit it provides. However, I think if Tanta's analysis could be presented, say at a congressional hearing, then it might pass. Of course, she woudl have to testify via speakerphone, with voice distortion
"Is there something wrong with making loans to people who can pay them back? It's become obvious that making loans to anyone who can fog a mirror isn't working out so well"
i thought this was the root of the system.. getting someone else money at all cost..
With respect to the comments about the cost of borrowing going up. At some level it has too - that's I believe, the underlying message of many of Tanta's postings - responsible lending takes time and effort, and that has to be paid for in the form of old and grizzled loan officers sitting around, and snarling all the younger ones into shape.
At another level, it doesn't matter. To a statistical approximation, the majority of people pay the maximum they can afford for housing, and historically, that was 3-3.5* income. That determined the price of houses. Increase that multiple, and 'all' that happened was the price of houses went up. With allowances for latency adjustments within the system, at the end of the day, most people still bought the same houses, they just paid more for them.
So if it costs more to borrow, house prices will adjust downwards even more, which is yet another of the systemic feedback loops the industry is fighting here.
Overall the system works just fine - Wall Street forgot to read the chapter on how it self-heals though.
How about if you can't pay your mortgage, you lose your home. If you lent out money to people who can't pay you back, you lose your money. If you bought stocks on banks who go belly up, you lose money. If you depended on monolines to insure you and they go belly up, you lose money. IF YOU MADE A BAD DECISION, YOU LOSE MONEY!!!!!
Why don't we just let the chips fall where they may. Nobody put a gun to people's heads when they made their decisions. Aren't we all adults. Life is tough sometimes.
If it would have all worked out fine, nobody would be bailing my ass out because I was dumb, sold my properties and went into cash. Nobody would be making up the difference to me for all the lost opportunity I didn't take advantage of. Nobody would be buying me the flat screen TV's, the fancy cars, the fancy jewelry I missed out on by being smart with my money.
I'm sorry, call me old fashion. Everybody should grow up and take their medicine. Learn from this, as I did from the internet bubble. Nobody bailed my ass out when I lost close to 30% of my portfolio. I learned and I moved on.
If I sound a little bitter, I am. Enough already with trying to help the bad decision makers. They took a gamble underwritten by their greed. Thinking they would make a fortune in appreciation by buying a house they couldn't afford. Life is tough when you make a bad decision!
It has become so un-American to be forced to face the consequences of your own poor decisions. Cruel and inhumane --- home buyers shouldn't have to face that, and neither should banks. Somebody should just give money to both of them.
Owl you are part right there...
it would be so if the market where truly free and transparent, but it isnt..
its crowded with insiders and riggers and to top it these ppl rule your country..
I'm sorry, call me old fashion.
Owl, you're worse than old fashioned. You're in a minority of about 5%.
In addition to higher downpayments, we estimate, based on current pricing for mortgages on investment properties, that a borrower is likely to pay one to three points on the entire loan amount
OH FOR CHRIST'S SAKE.
So this is MBA logic: investment properties can currently be crammed down. If we changed that so that primary residences could be crammed down, we would end up pricing primary residences the same way we price investment properties. Because, um, every principal residence would then have the same probability of default or BK as every investment property. Because, um, you see, er, . . .
i know! ridiculous!
"Back in my consumer lending days, cramdowns happened with regularity on auto loans. Truth be told, I would rather get crammed down most of the time, since:
A) The vehicle would only bring in that amount or less at auction anyway plus it saves time and expense.
B) If the borrower did default on the crammed-dowm balance later, it was non-dischargable."
Think of someone with a lot of student loans who then gets a non-dischargable mortgage.
And remember that these are people who have a track record for bad financial decisions.
This just makes me so cross. Respectfully Tanta, I disagree. You are condoning a bailout. It's just plain wrong and it's not fair to people who saved and sacrificed and own their homes by being responsible. Let the people facing foreclosure be foreclosed upon or mail in their keys. Let the banks then take ownership of millions of homes which they can bulldoze and write off to zero. Let the banks take their losses like grown ups rather than screaming for bailouts like four year olds ("whocoodanode?! whocoodanode?!"). Throw a few bank CEOs in jail, Enron style. Maybe then we can all move back to where people scrimp and save for years for a 20% downpayment.
Until then renting is the new black.
When I push the "cram down" button on my trash compactor, the trash dosen't go away but it will allow more room for me to pile on more garbage : )
A pox on both your houses. That is both borrowers and lenders were equally greedy and wanted zipperless wealth.Well the cramdown is going to happen and society as a whole will be forced to pay for this greed.
From what I read on this blog, recovery from BK is is less painful say then genital herpes.
The borrowers seem to fall mostly into two camps. First the sociopathic second those incompetent to handle their own finances. In either case they are a menace to society.
I suggest that as part of the cramdown deal that the borrowers go into credit parole, where a trustee would have to approve the accrual of any debt for say five years
You are condoning a bailout.
No, I'm condoning bankruptcy as a socially and economically necessary part of how the American economy works. If you're just anti-BK on principle, I can't convince you otherwise.
However, the historical rationale for exempting mortgages on principal residences from modification in BK--no other secured debt is so exempt--was that mortgage lenders provide a necessary and viable public service. They should therefore be shielded from the worst effects of borrower BK.
Are you going to tell me that idea isn't laughable at the moment?
I vote that MBA join NAR in "the dumbest sons of bitches on the planet" category.
you can not do this.. the system needs ppl to consume to keep going so more debt to everyone..now at a discount...
Let the banks then take ownership of millions of homes which they can bulldoze and write off to zero.
Unfortunately, sterlingerl, that would take down everyone else with them. I'm sure that's not what you have in mind. Sometimes you have to save some that don't deserve to be saving in order to save more in a bad situation. That's not going to help anything.
The answer to the housing problem, again, is to clear the mess and get the market moving again, which will in turn clear the housing inventory and start the market moving again. We can't clear the mess in a short time, however, because the write-downs would be catastrophic and we risk total systemic meltdown.
So I wonder how to skate through this, buying time to mark things down, trying to slow down the price depreciation on houses, and trying to unstick the credit markets. Oh and all the while trying not to send inflation through the roof, or causing a Japan-sytle deflation. All I can say is I'm glad I'm not a Fed governor at this point...yeesh. I'd be pouring scotch on my cheerios.
Yeah, at the end of the day, there simply won't be a large number of borrowers 100k or more underwater on their home loans because either they'll jingle mail their keys or wait for the Sherrif. The questions are: is it worthwhile trying to keep them in their homes by lowering the principle owed, and how will this be reflected in their credit history?
I'd bet that for a very large proportion of borrowers, there is a principle reduction and loan terms that you could offer them that would result in lower losses than a foreclosure and REO sale. But the thing about REO and sale is that at the end of the day, the market price of the home is found in an arms length transaction. Even if the bank looses a little by auctioning rather than using a RE agent, the market has spoken. The problem with cramdowns or the FHA plan is that without any actual sale, you're relying on an appraisal to avoid excessive writedowns of principal. I see no particular reason to believe that the appraisal process has suddenly improved since 2005.
As for how this is reflected on the borrowers credit record, that's really not an issue IMHO. 5-10 years from now, lenders will decide how they decide to regard people who overbought and then got out from under their house in the next couple of years. To think that it will be of primary interest to them whether it is tagged as a foreclosure, or a bankrupcy, or a Shiny Happy Government Plan, assumes that they will be sadder but no wiser after their losses, which seems unlikely to me. Their pricing and rationing of credit in the future will be determined by how much money they have and what the pool of potential borrowers looks like. There really is no difference between whether 60% of them have foreclosures or whether 60% of them have bankrupcies with cramdowns or whether 60% signed up for some other relief program. They'll serve the other 40% first with reasonable rates and then look at those 60%.
[I suggest that as part of the cramdown deal that the borrowers go into credit parole, where a trustee would have to approve the accrual of any debt for say five years]
Good news for you: that's part and parcel of the 13 system already.
However, don't be fooled into thinking that a moratorium on new debt is a cure-all. The Chapter 13 system is no more about rehabilitiation than our prison system.
Borrowers don't come out the other side healed or educated. In fact, since most of the money has been managed by others for a number of years, they finish their tour of duty with even less financial skill than they walked in with.
The discussion on cram downs has a quality of observing something the wrong way through the telescope. It doesn't seem like a proposal to save the banking system; it seems like a change to allow bankruptcy judges one other tool to deal with the cases in front of them. We can hope that overall, whether or not they wear black fishnet stockings in their off hours like some Bush appointees in Boston, they will for the most part handle their power responsibly. Without numbers, the world of home lending should consider the change to be nothing more than weak tea.
I don't care if they change the rules going forward. When you sign a contract the rules are known to both parties. Changing the rules after the ink dries is wrong.
Of course I'm sure that cram downs couldn't occur after the 70's law (I'd love to know the name so I could read it) for loans made prior to it's passage.
So we get a nice bit of karma. Because the 70's housing market wasn't exactly a fun ride, if the stress my parents experienced was any indication.
Cheers,
The problem with cramdowns or the FHA plan is that without any actual sale, you're relying on an appraisal to avoid excessive writedowns of principal.
Well . . . I'm not so sure about that. I'd bet that a whole lot if not all of these people can bring in the documentation showing that they did list the property for at least 90 days and they did not get a single offer at or above the loan amount.
I really think you have to think about it in contrast to a short sale, not FC. In a short sale, the lender lets the property go for the best private-sale bid someone can scrape up. It has dog to do with some appraisal; it's a matter of who submits a contract offer for how much in less than six months exposure time.
If these folks are trying to short-sell because they really want or need out (couldn't afford even crammed down terms, or need to relocate or something), then just do the short sale. If they're in this because they don't think they have the option of staying, then cram it down to the same amount you'd get in a short sale bid.
2 notes on my comment above: Oops that should of course be principal, not principle. And I wasn't obvious enough with the point that without an arms length market transaction, the possibilities for fraud are rampant.
As far as banks taking their medicine, I agree in part. If the medicine is so bad that it results in death, not so much. If we have major bank failures then we get into the cascading cross defaults, total financial meltdown scenario. We need the banks as institutions to survive. However, that does not mean that the common shareholders of the banks need to survive. I have called for it many times before here, and generally gotten little response, but one of the first things that has to happen is major cuts or elimination of dividends and share repurchase programs at banks. This should be within the power of the Fed/CofC to do. Hard caps of compensation should also be imposed. A hard cap would include not just salary, but also bonus, stock options deffereed comp plans etc. Something like 250K sounds reasonable. If bank bailouts are needed, then the banks should be temporarrilly nationalized, recapitalized and then the government sell off the bank to new investors, existing common shareholders get nothing.
MP
How's Conjure?
Tanta, but in this case you don't HAVE a short sale bid. The idea at some level is that there is some premium that people who are already living in a house and want to stay there will pay over the amount that somebody else would pay plus the transaction costs. Yes, it is easy to determine that the house is upside down, but it is difficult to determine exactly how far upside down it is, especially in a RE market dominated by foreclosures. And of course like chapter 13s and workouts, there's no gaurantee that the market won't continue to fall and you'll have to do the same thing again.
Didn't see this point mentioned.
Assume a cram-down happens.
Assume that at some point markets start improving.
What did the cram down do?
Give the borrower a windfall - all of the sudden, that forgiven debt becomes -profit-.
If you need numbers:
original loan: 300K
current value: 250K
cram down:
new loan: 250K
property value increases to 325K over 5 years and borrower sells
profit without cram down:
325K - 300K = 25K
profit with cram down:
325K - 250K = 75K
Why should the borrower get this windfall for being delinquent? What about his neighbor who paid his loan on time?
This is what the OTS tries to address. It is a VERY hard issue to solve.
Of course I'm sure that cram downs couldn't occur after the 70's law (I'd love to know the name so I could read it) for loans made prior to it's passage.
11 USC § 1322(b)(2). Have a ball.
Or just read this:
Calculated Risk: Just Say Yes To Cram Downs
The banks and MBS investors can take the cram down - in whatever form it comes - or they had better develop a property management department. We can all just become renters.
And of course like chapter 13s and workouts, there's no gaurantee that the market won't continue to fall and you'll have to do the same thing again.
Of course there isn't. But that would be true however you arrived at a current value of the property.
My point is simply that either a borrower can bring evidence of an attempt to sell the property, showing what the best offer was, or a BK judge can request an appraisal that uses short sales as comps (which you normally wouldn't do). Yes, it's a challenge to value properties in a declining market, but that's no reason to think it's just impossible. The judge can always add the "owner premium" in to arrive at the modified balance.
The other thing that the OTS proposal does is remove some of the incentive to get a low estimate of current value for the writedown. Otherwise if the principal loan amount comes in at less than you can sell for you sell immediately, pocket the difference and go on your merry way. The problem is that if you think prices will CONTINUE to fall, your incentive is to sell immediately. I suspect that their program would only work if it still left borrowers upside down and trapped, just not SO upside down that they would jingle mail. Hard to thread that needle.
property value increases to 325K over 5 years and borrower sells
You know, we go through this every time I post on BK.
Please. Familiarize yourself with how Ch 13 works before going off on this stuff.
Hint: in a CH 13 repayment plan, the borrower is actually making both the full crammed-down mortgage payment plus some contribution to the stripped-off debt (it gets thrown into a bucket with all the other unsecured debt). These payment plans usually last three to five years.
And of course if the principal loss is mandated by a Judge or government program, the "lender" doesn't have to worry that a workout will set them up for bondholder suits.
jeebus, haloscan is killing me today. some people may find this helpful:
HEAT
Tanta:
You make my day, when you put up posts like this!
Thanks.
the historical rationale...was that mortgage lenders provide a necessary and viable public service.
I thought it also had more to do with chap13 plans run 5 years, and mortgages usually having much longer terms.
Two important concepts some of you d00dz really need warm up to:
BK SUX: Some among you seem to be forgetting that cramsdowns only occur in a BANKRUPTCY. The last time I checked, personal bankruptcies still r teh suxorZ. (plschwartz - I'll trade you a chap13 for your GH anytime.)
Life isn't fair Can we please let it go on the fairness dream here? For starters, "Fair" is a concept only rivaled in terms of subjectivity by "Beauty" - but no matter what you consider fair, there is zero chance that this all will end 'fairly'.
Some contribution to the newly-unsecured piece - like 1%. The crammed-down debt won't get repaid. These borrowers likely will have all of their "disposable income" used up by the secured portion and whatever else is in line before the stripped off piece.
But hey,
If you want to give investors one more reason to avoid the MBS markets, go for it.
But don't ignore what the consequences of that will be.
Most likely, they'll either be financially better off or still in possession of their homes, but not both.
There's the paradox. Everything we've seen so far has been an attempt to keep people in houses and carrying loans they cannot afford. It isn't about the house, it's about the debt. That means it is not about the people it is about the lenders. For some strange reason the lenders are making a fundamental error. They are assuming that as long as they can keep people in houses and paying things will work out for the lenders. The battle cry is "it is better than the alternatives." If I want cheese with my whine I'll go to Cracker Barrell... oh, wait...
the historical rationale...was that mortgage lenders provide a necessary and viable public service. Well historicly it was also rare for borrowers to be dragged down primarily by their underwater house. Most people who went bankrupt could EITHER sell or continue to make payments if relevied of other debt.
These borrowers likely will have all of their "disposable income" used up
Bad assumption. If that were the case, they wouldn't be allowed to reaffirm under any circumstances (cramdown or no cramdown). As Tanta said: "Please familiarize yourself with how Ch 13 works before going off on this stuff."
Shnaps, this is just a variant on the argument that health care insurance costs should remain prohibitive because otherwise people will go rush out and get a bunch of unnecessary medical care. You know, surgical biopsies and invasive screening tests are so damned much fun to undergo that people will demand them when they have a head cold, since they're "free." Or, the assumption is, we'll all immediately turn into chain-smoking alcoholics who do no exercise and eat nothing but bacon and eggs and cheetos because we know we can get "free" quadruple-bypass surgery.
Anyone who thinks Chapter 13 is a minor inconvenience in a life filled with windfall profits should just go file now. Enjoy yourself.
/closes italics
And of course, as we approach a situation in bubble markets where MOST sales ARE short sales, there would seem to be little reason to not use them in your comps. After all, when a "typically motivated," IS desprate to get out of a mortgage they can't afford, we should be looking at that price.
So...
Interesting, but you're missing the point. Yeah, sure its a hard issue to solve, but nobody cares.
Millions of people are about to become homeless. Today. RIGHT NOW.
Throwing millions of people out on the street, i.e., messing with "The Dream" as Tanta calls it, is politically infeasible.
Bottom line: government will throw whomever they need to under a bus, and that includes the banks or anybody else, regardless of how big the bribe was, before their own survival comes into doubt. They run the courts, they enforce (keyword: FORCE) the laws, they print the currency.
In short, the game begins and ends with the government. And the MBA is utterly stupid, at this late stage, to think they are (or could make themselves) somehow bigger than the game itself.
Backing up Schnaps, partly -
If people are concerned with punishing the guilty and minimizing costs to the innocent, bankruptcy cramdown is the way to go. Guilty borrowers are stripped of liquid assets and get their credit slammed. Guilty lenders lose lots, and quickly. Finally, society benefits by fewer foreclosures and more homeowners who will be able to sell and move. OK, you don't get to lash foolish middle-aged homebuyers with your cat-o'-nine-tails but that wasn't going to happen anyway.
Disagreeing in that I do think bankruptcy cramdowns are fair, or at least the fairest proposal on the table at the moment.
short sales, there would seem to be little reason to not use them in your comps.
Why would you even consider not including short sales in comps? Short sales are still sales in a mutually agreed-upon arms-length transaction. So are REO sales. An appraisal is an attempt to assess the market price. If the 'market' is nothing but REOs - well too bad - it's still the market.
it's not a minor inconvenience. but seriously, don't pretend that the stripped portion will ever be paid off in full in the vast majority of cases.
the problem isn't people rushing to ch13...the problem is the reaction of the people who fund most of the mortgages. don't forget - it* will also hit Fannie and Freddie, and their limited capital positions.
it won't be a good reaction for anyone concerned.
*it: defined as immediate drop in value of MBS and whole loan holdings upon passage of bk bill (scale dependent on how bk law is written).
Owl @ 2:22 RIGHT ON! If I knew how to triple the font and make it bold I would have done that. The factor that has been missing in all this BS is personal responsibility. There are a lot of folks on this board that seem to have forgotten this aspect. If we wind up penalizing the people that made prudent choices by just giving out $400-750,000 homes to irresponsible borrowers I, for one, will be sorely tempted to put my training in Viet Nam to use. I would imagine I would not be alone.
Sorry - make that Owl @ 12:17
Why would you even consider not including short sales in comps?
My point was precisely to develop an appraisal that specifically tries to arrive at the "distressed sale" value, not the "typically motivated" value that appraisals are theoretically aimed at.
It may be that most sales in your neighborhood are distressed, not "typically motivated." So that should make it easier to come up with a distressed liquidation value.
Until the rules are changed, the standard definition of a GSE-acceptable appraisal sill has "typically motivated buyer and seller" in it, does it not?
"Millions of people are about to become homeless. Today. RIGHT NOW."
Bullsh!t.
People can afford to rent. People can short sell -> get a cheaper house. There are many options. It's not like people are foreclosed upon and camp out in the woods in their backyard that night.
No one is becoming homeless - unless they lost their job or something - in which case nothing but direct cash aid can help them.
Like it or not those of us that bought properties we could afford and faithfully pay every month are going to pay regardless. We will pay for it through our 401Ks, pensions, local taxes and/or reduced local services, inflation, potential job loss, etc. We will get no government help or break on our mortgages because we are not delinquent or underwater. Stop f*ing around. Just do whatever needs to be done and do it quickly. That's all I ask.
Tanta - **I support the bill, nonetheless, because giving residential mortgage lenders preferential treatment in BK proceedings has not worked out well for us, and if it takes the threat of cram-downs to sober everyone up on credit standards and pricing, then let's get on with it. **
Excellent summary! (I've finally figured out that sometimes even when you agree with a position you have the appearance of disagreeing with it because their logic on the way to the conclusion is sooo annoying - so a nice summary at the end is helpful. But hey, the awesome sarcasm and the behind the scenes factoids are great even when I can't figure out your overall view. Seriously.)
My only issue with your rationale for the change in bankruptcy is that adding incremental problems to the financial system right now may not be the best idea in the world. ? (OTOH adding risk to consumers is probably not ideal either - but it isn't clear that the consumers in question are going to be spending a lot on the economy anyway?)
And if you want to punish crooked borrowers, bankers, brokers, buffoons, or any other b-words, set them to work demolishing vacant houses with hand tools. Then let's all move on.
OK theres a huge huge difference unless I misunderstand something.
Current BK rules for Ch 13 provide that any undercollateralization of a mortgage produces a bifurcated unsecured debt that cannot be reduced.
Example: I am a bank and I have a $300,000 mortgage on your house which is now worth $200,000. I am considered a secured creditor for $200,000 and an unsecured creditor for $100,000, but unlike any other unsecured creditors, no Ch 13 plan can force me to write down that $100,000.
Under the proposed changes (SOMEONE TELL ME IF IM WRONG) then that $100,000 "unsecured" debt can be crammed down.
Here's what I don't get.
If I (the bank) am completely taken out of the picture and get a check for, say, $225,000, I agree this is financially probably at least as good as foreclosure.
If instead I am still on the note but the principal is somehow reset to $200,000, then if the house goes back up in value eventually the homeowner gets to capture all that?
How is that not a bailout.
At least in the OTS plan the homeowner doesn't get to capture all that.
I may be wrong here AND IF A BK EXPERT CAN CORRECT ME PLS DO SO but why should I be forced to stay on the risk with any possible price recovery now transferred to the owner?
Clark, I am suggesting that the cramdown exclusion for mortgage lenders creates moral hazard for mortgage lenders. It says to mortgage lenders, don't worry about lending more than the property is worth to a borrower burdened already with too much consumer debt, because you'll still be first in line in BK.
Look, a lot of these mortgage loans in question involved people cashing out the house to pay off credit cards. They didn't do that because they're so savvy. If the debt were still unsecured CC, they could go Chapter 13, keep the home (since the mortgage wouldn't be underwater), and discharge the unsecured debt.
But some loan officer talked them into paying that unsecured debt off with mortgage money. Because the interest rate on mortgage money is cheaper. Why is it cheaper? It's secured. What if it's not really secured, because the appraisal's a joke? Too bad, you lose your house anyway.
Putting cram-downs back into the equation forces mortgage lenders to stop pretending that these very high LTV cash-outs are really "secured."
My point was precisely to develop an appraisal that specifically tries to arrive at the "distressed sale" value
sorry, I missed the earlier post. At risk of topic-creep, here's my 2 cents on that:
A distress sale value is easier said than done, as there is basically a range of situations when it comes to defining 'distressed' situations. I'm guessing tatt what the GSEs language is mostly aimed at omitting any non-arms-length deals.
I would argue there is a spectrum of what constitutes 'typical' which ebbs and flows over time. In general, it's called the market. In good times, it's a 'boom' market, in bad times, it's a 'distressed' market, but it's still the market - particularly from the potential buyer's point of view.
As a buyer in the market, I may not know that I'm dealing with a short sale situation until well after I've made an offer, if ever.
It may be that most sales in your neighborhood are distressed, not "typically motivated." So that should make it easier to come up with a distressed liquidation value.
I would argue that if most sales are distressed, than distressed in the new typical. The justification for ignoring them in the first place is that a sale by an atypically desprate homeowner is likely to be an outlier. You don't want the occasional outlier to disproportionately affect your estimate of the price that is more likely to be agreed upon by a more typical sale.
Tanta said: "Why is it cheaper? It's secured..."
Cram downs create uncertainty as to what exactly is secured - and will cause investors to discount pricing on bonds because of this risk - and will increase interest rates to borrowers.
here's my 2 cents on that:
you couldn't come up with that line in the thread about negative equity certificates yesterday? it might have been worth a point, you know...
fred, you're a little confused.
Under current law, a borrower in Ch 13 with a principal residence can either affirm the entire debt--at its contractual terms--and keep the house, if the borrower makes the payment during the entire repayment plan period, or the stay is lifted and the lender can FC. There is no "bifurcating" of the mortgage debt on a principal residence.
If the lender forecloses today, it will have to try to unload that REO as quickly as possible. There just isn't a way for the lender to hang onto the property for five years to take advantage of that future appreciation back to the original mortgage amount by foreclosing.
So what happens, currently, is that if the lender doesn't work things out with the borrower voluntarily, and the borrower files for BK, the lender is going to get the house back, and unload it at a distressed price, and take a loss.
Alternately, if we changed the law, the judge could in essence impose that same loss on the lender (via the cram-down), the lender would continue to earn interest on the remaining balance, and if the property appreciated in the future and the borrower continued to make payments until it was sold, the lender would get back the outstanding crammed-down principal.
Sure, you can think of that as the BK borrower "getting" the appreciation, but the alternative is for some new borrower to "get" the appreciation by buying the REO at today's distressed price.
The MBA is just trying to convince itself that if we somehow forced these borrowers to reaffirm the whole debt, the money fairies would show up and provide them with the ability to pay it for long enough to get us through the downturn, back to an environment in which we don't mind foreclosing again.
As a buyer in the market, I may not know that I'm dealing with a short sale situation until well after I've made an offer, if ever.
That I kind of doubt. What I'm hearing is that the things get originally listed at an above-mortgage price, they get no offers, the listing expires, then they relist them at a below-mortgage price with a "lender must approve" code on the listing. If you don't realize you're making an offer on a short-sale property, you're not using a realtor, I suspect.
I have several problems with this proposal. If a borrower can just file for bankruptcy and claim to be unable to pay his/her mortgage, just so some judge can reward him/her with a lower interest rate, exactly what is the point of making a loan to that borrower to begin with?
Why don't we have judges oversee every mortgage loan before they're made to begin with?
Because most borrowers wouldn't be able to qualify for a mortgage to begin with. Oh, okay, I get it.
Cram downs create uncertainty as to what exactly is secured
No, they REMOVE ALL DOUBT about what exactly is secured.
"but no matter what you consider fair, there is zero chance that this all will end 'fairly'."
very true Shnaps-I don't care about fair. Just quick is all I ask.
"Lawmakers eye home-buyer tax credit as way to move inventory'
Lawmakers eye home-buyer tax credit to move inventory - MarketWatch
Why not just cut the price?
"No, they REMOVE ALL DOUBT about what exactly is secured."
the cramdown happens -after- an investor buys a security, not before.
It also places a cap on the $ amount of recoveries. Property values go both ways - down and up - cramdowns don't.
Are we just assuming these cramdown ideas are Chap 13? I get the feeling this nec proposal is a way to force the lender into a cramdown without the borrower doing a BK.
Interesting. I will ask my Realtor about that. If the people you are hearing about are trying to sell at an non-market-clearing price, maybe they're not working with a Realtor. I guess in my own home-buying experiences, I've always been more focused on the houses themselves, rather than looking for short-sellers to put over a barrel. But I suppose there may be certain segment of buyers who do just that.
Again, if such folks are the bulk of what consitutes the 'market', then that's what's 'typical'.
What if a seller is interested in selling quickly to bring quick closure to a divorce? Would that one do in the 'distressed' pile or the 'typical' pile? I could go on and on...sorry, T - I often agree w/you, but not on this one.
Anyone who thinks Chapter 13 is a minor inconvenience in a life filled with windfall profits should just go file now.
To the crooks and entitlement artists with PhD in fraud, it isn't even a minor inconvenience.
You can not use standards for ethical and educated people when you have a population that meets and exceeds the worst racial stereotypes.
Add radical activist judges like for example in the 9th circuit court and you have chaos.
Maybe all the honest people move to Canada, eh? LOL
Should read "large % of population"
And of course Shorts, REOs tc don't have to be a majority until they shouuld be considered for comps. Once they're common enough that they're always available, they consitute a big enough proportion of the market that they should be averaged in IMHO.
I guess I'm even more 'out there' than jim a - absent any form of collusion between the buyer and the seller - a sale is a sale is a sale.
I guess in my own home-buying experiences, I've always been more focused on the houses themselves, rather than looking for short-sellers to put over a barrel.
I'm not making any judgements about the buyer. I am simply saying that if the property is listed at a price less than the loan amount, and the borrower doesn't plan to bring cash to closing, the listing agent is obligated to disclose up front that any offer submitted will be subject to lender approval.
In other words, if you list at a price that would make you whole, the only offer you get is below mortgage, and you have to ask for a short sale, well, then you tell the buyer about the problem. In that case, you wouldn't have had a failure to disclose properly, because the property was not listed at a short sale price.
But if you have wised up, and you list your property at a short price, you have to disclose to prospective sellers that any offer will be subject to lender approval. My observation was, then, that if a prospective buyer fails to notice that the property is listed with a "lender must approve" indication, that buyer is probably not working with an agent. An agent would be able to spot that on the listing.
This was just by way of noting that you can use MLS to find, specifically, short sale listings. It won't be all houses that end up selling short, but it should be all that are listed with the intention of selling short.
And of course by "prospective sellers" in the above post I really mean "prospective buyers."
The drugs are still wearing off.
Alright, this was already said once in this thread, but it need to be repeated.
Millions of people are about to become homeless. Today. RIGHT NOW.
You're full of crap, but I wonder if you even know it?
They're not becoming homeless - they're becoming RENTERS.
And they just scooted by without paying "rent" on their mortgage for the last 6-9 months, so if they have a lick of sense, it won't be any problem for them.
If I tried that, I'd be out on my ass after the landlord evicted me in less than 2 months.
So cry me a river - sell stupid somewhere else, I'm not buying it here.
Sorry to be so blunt and disrespectful, but these poor folks you're talking about did my family and my country direct measurable harm. I refuse to have sympathy for either the borrower or the lender in this mess.
The only question is what we can do to minimize the damage going forward. If it wasn't for that, I'd love to watch all involved parties burn.
My observation was, then, that if a prospective buyer fails to notice that the property is listed with a "lender must approve" indication, that buyer is probably not working with an agent.
In my area of the country (South SF Bay), it's common (shockingly common) to see "short sale, subject to lender approval" right in the MLS description text - so I suspect it's not a surprise for most people. I'd have to wonder about someone that didn't put that in their description text... and probably move on to purchase a different property. It's not like you lack for choices right now.
Glad to see so many have such tender concern for the poor, poor mortgage lenders.
Duty! Accountability! Personal responsibility! Moral fiber! The mob tearing down the pillars of capitalism! Barbarians at the gates! Aieee!
I guess it's easier to be a reflex monkey than look at what's actually going on here.
All you "pro-business" folks: what if your business happened to be, I don't know, unsecured credit card lending? Maybe you didn't even lend irresponsibly. Maybe you sent out the plastic before the hapless buyer even bought the POS house.
How would you feel then? Watching a bank elbow its way in front of you in the BK line by pretending its debt is "secured" when you all know damn well it isn't secured at all?
Would you still fear for the pillars of capitalism if somebody stopped the bank's claim from being privileged over yours?
Or is the reflex monkey confused now?
All this talk of appraisals and fair home values is nice, but I suspect it will last about as long as it takes for a divorced mother of three to start misting up at the bankruptcy proceedings.
Do you seriously think that a judge would evict a family from their home because, after looking at a fair appraisal value and a fair market interest rate, the family still cannot afford the home?
I think you seriously underestimate the human factor. Foreclosures work because they're an ironclad rules-based machine; the judges don't have to make any personal judgement decisions, if someone's not paying it goes into foreclosure. But once you add the human element, judges are going to realize--correctly--that the intent of the new law is to keep people in their homes, and as such will become suprisingly "creative" when it comes to valuations and/or payment plans.
There may be some judges who follow the rules and end up evicting families who cannot afford their homes under any fair valuation, but that will last about as long as it takes the evicted families to write their local Congressional representation.
And at that point, we'll hear the "hoocoodanode" from people who claimed that this would all be rules-based and not open to abuse, and who denied the possibility of a moral hazard--the potential for people to continue to buy homes far more expensive than what they can afford, knowing, at some level, that the government will ensure that they keep their homes.
The burden will shift to the banks, who will review documentation ten times over (at which point Tanta will declare victory), and then will charge higher interest rates to compensate for the extra cramdowns they will still receive, even with the extra documentations (e.g., member of the family contracts severe illness->family goes delinquent on loan->sympathetic judge writes down value of loan to what they can afford.)
Robin Hood-esque punishment of the banks is all well and good, but I have yet to hear a reasonable argument that shows how the burden of all this will not fall on new borrowers.
but I have yet to hear a reasonable argument that shows how the burden of all this will not fall on new borrowers.
From a mortgage pricing standpoint, you're right in that stricter standards WILL burden new borrowers. But what those borrowers get in return is sanity in houing prices.
I love the folks who seem to think this issue is the "government getting into our business again". I was in the prime mortgage business as a Loan Officer for 5 years. My employer-bank is a mid-sized regional institution. We required 10% down on everything. Everything. No subprime. We turned away a lot of business, but that bank made plenty of profit and has no problems with real estate loans.
These lenders who are getting burned now have no one to blame but thenselves. They relaxed the standards to "fog the mirror" levels and absolutely should have known better. It will probably take the government to fix the problem and regulate lending. These greedy lenders did it all to themselves. Reality bites, huh?
I'm not too concerned about the program itself, for the reasons Tanta expounds. I am concerned about the spin.
If this is sold as "Mortgages should be treated the same as all other forms of debt, with no special protections for either the lender or the borrower," then I'm all for it. And essentially, that's what it does. As such, it is actually proposing less government interference, not more.
I have some concern that it will end up getting spun in the opposite direction, since politicians and popularity seekers will take credit for any positive effects of the act as though it added something, not just removed somebody else's unwise addition.
The last changes didn't exactly work out as planned for its backers.
Betcha these won't, either.
JBL: If this is sold as "Mortgages should be treated the same as all other forms of debt, with no special protections for either the lender or the borrower," then I'm all for it.
Treated the same as all other debt? As in, with the same interest rate as the car loan, or the loan for the furniture, or the loan for the electronics entertainment system?
Because that is what is being proposed here--removing mortgage's special protection and making them the same as other collateralized debt, subject to modifications in bankruptcy court if the buyer cannot pay. So why would the interest rates be any different from what they are for other collateralized debt, e.g. car loans or home entertainment system loans?
Because that is what is being proposed here--removing mortgage's special protection and making them the same as other collateralized debt, subject to modifications in bankruptcy court if the buyer cannot pay.
I see you know exactly as much about mortgages as you do about bankruptcy court.
"So why would the interest rates be any different from what they are for other collateralized debt...?"
Because of intrinsic financial characteristics like the nature of the collateral, and not because of artificially legislated distinctions.
"Like other loans" doesn't refer to the individually negotiated loan terms, it refers to the general legal framework. No one is suggesting that judges would arbitrarily modify interest rates any more than they would arbitrarily shorten home loans to a five-year amortization.
Tanta ==
I'm not confused, I just write that way
You and I are saying the same thing, that is (and what I meant) that if the law is changed then an undercollateralized morgate lender will EXACTLY be bifurcated into its secured portion and unsecured portion and the unsecured portion crammed down, written off, converted, whatever unless they agree to a novation.
Why can't instead the new law be that the mortgage lender's loan is reformed automatically into a negative amortization loan?
For that matter, in all the bailout proposals (feh), why can't the new mortgage be a negative am mortgage instead of OTS "certificates" ???
Is there some prohibition against insuring a negative am mortgage, even if for a capped or fixed amount?