I wrote this in the previous thread, but it belongs in this one:
Hooray! I can't think of a better way to ensure that mortgage rates soar than forcing banks to include the risk of future cram-downs in their business models. And with soaring rates will come crashing house prices.
This is exactly what judges had the power to do until recently when banks "helped" pass legislation to make bankruptcy more difficult to attain and debts harder to expunge in court. This is nothing new. It is good for individuals, if that "individual" is not a corporation.
Your probability of benefitting from the housing bubble is now offically tied to your personal culpability. Rob Dawg | Homepage | 01.06.09 - 9:33 am | #
It is good for individuals, Bob | Homepage | 01.06.09 - 9:35 am | #
It is good for individuals who have impaired senses of housing valuation. It is bad for individuals that understand that price/income or price/rent were outrageous. It is also bad for future mortgages, which will have higher rates in order to prepare for future cram-downs. (But it is great for cash buyers, who will benefit from the lower prices due to higher rates.)
So who takes the losses? The lender who made the foolish loan, or the responsible taxpayer who actually pays for the stuff he buys and returns the things he borrows?
It is unbelievable that cram-downs are even considered. They definitely won't work. If someone is so upside down that they can't pay their bills, will a 10-20% reduction in their mortgage change their situation?
Hooray! I can't think of a better way to ensure that mortgage rates soar than forcing banks to include the risk of future cram-downs in their business models. And with soaring rates will come crashing house prices.
Why don't you, and some others in this thread, take a precious moment to read Tanta's excellent pieces on cram downs, rather than pontificating loudly on topics you know nothing about?
Actually, JP's and Rob Dawg's were, IMHO, much more informative and appropriate, with appologies to Tanta. xxxxx | 01.06.09 - 9:40 am | #
I would have said that we were more pithy than Tanta. But pithiness was nowhere near next to Godliness with her, which was of course a part of her charm.
"The legislation would change allow bankruptcy judges to modify home loans in the same way that they currently may modify other unsettled obligations, such as credit card debt."
I thought mortgages were secured by real property...or is credit card debt a secured loan and I missed that some where?
CC cram downs are designed to keep lender from losing all on unsecured debt. My understanding of a mortgage is that the lender believed the real properties value was worth the loan ammount, and thus would take said real property in case of default...and said borrower agreed to said terms.
I see no reason to change the rules in the middle of the game to benefit either party to that contract.
Perhaps if this passes the Fed can buy like a gajillion $ in mortgage debt...you know...to keep markets "liquid".
....what happens if I as a homeowner and seller decide to carry the mortgage myself. Can some judge decrease the amount a buyer is supposed to pay me for a home I sold them?
JP, please read Tanta's article referenced to answer all your concerns.
Second that advice.
I learned some time ago that when someone who's smarter (or at least more informed) than I takes the opposite side of an argument from me - especially as concerns a field in which that person is an expert - I'd better ask myself 'why?' before spouting off my two cents.
Tanta, to engage in a bit of understatement, certainly qualifies on that score.
Folks, we're past the point where the cramdowns are going to be happening entirely to benefit credit-glutted idiots. We're now talking about a significant number of folks who did the right thing (in say 2000-2003, much less 2004-2007) but have lost their jobs/livelihoods in the past year due to the excesses of everyone else.
Furthermore, (this may be naive) but I'd certainly hope that any BK judge, having taken a close look at the debtor's financial choices on their road to ruin, would use some judgment in deciding whether a mortgage modification would be a sensible way to get them back to financial health.
Let's just retroactively abolish all debts entirely. Problem solved!
I have to agree. The easiest way to solve the foreclosure problem is just have judges eliminate all mortgages everywhere. Then everyone has a house, tons of extra spending money, and the economy is back on track.
Your probability of benefitting from the housing bubble is now offically tied to your personal culpability. Rob Dawg | Homepage | 01.06.09 - 9:33 am | #
Or in other words: I can haz moral hazard? JP | Homepage | 01.06.09 - 9:35 am | #
I just finished reading the comments from Tanta's 2007 post. It is scary just how right I was abouts teh moral hazardz. At that time I was alone in the wilderness as to the severity of what I also called an attractive nuisance. Everything has come to pass. Scary.
....what happens if I as a homeowner and seller decide to carry the mortgage myself. Can some judge decrease the amount a buyer is supposed to pay me for a home I sold them?
This is an outstanding question. And can you, as seller, then apply for TARP funds?
"Hooray! I can't think of a better way to ensure that mortgage rates soar than forcing banks to include the risk of future cram-downs in their business models. And with soaring rates will come crashing house prices.
JP | Homepage | 01.06.09 - 9:34 am | # "
BondsOfSteel writes:
Cram downs should only happen without lender consent if the 'homeowner' can prove apprisal fraud was likely.
Tanta: Everybody talks a lot about moral hazard, and the reality is that you're a lot less likely to put a borrower with a weak credit history, whose income you did not verify and whose debt ratios are absurd, into a 100% financed home purchase loan on terms that are "affordable" only for a year or two, if you face having that loan restructured in Chapter 13.
Cram downs are like rebating the tickets on the Titanic after the iceberg has been hit. Got to keep the steerage class pacified while the upper decks grab the lifeboats.
Just keep in mind - the homeowner doesn't get to make the decision on the cramdown - the judge does. So I wouldn't stop paying on the mortgage just yet.
Of course the idea sticks in everyone's craw, but there aren't going to be any easy, pleasant solutions to this mess. We went through this whole thing here a year ago. Like almost everyone, I started off shocked and appalled at the idea. However, I found Tanta's posts to be persuasive, and grudgingly came around to the idea that in bankruptcy, under the administration of a judge, cramdowns might sometimes be appropriate.
I don't see the moral hazard. If you bought a $300K house in 2004 that is now worth $150K, your mortgage will be readjusted to $150K meaning that you've lost the down payment plus whatever you've paid over the last few years. You end up with zero net value since you have (value of house)-mortgage).
Alternatively, you can go into foreclosure and still have zero net value (no house)-(no mortgage).
"Hooray! I can't think of a better way to ensure that mortgage rates soar than forcing banks to include the risk of future cram-downs in their business models. And with soaring rates will come crashing house prices.
JP | Homepage | 01.06.09 - 9:34 am | # "
Yes, part of the problem has been too few low-risk borrowers, and making it riskier to lend will not increase lending.
"ac writes:
So who takes the losses? The lender who made the foolish loan, or the responsible taxpayer who actually pays for the stuff he buys and returns the things he borrows?"
" Rob Dawg writes:
Your probability of benefitting from the housing bubble is now offically tied to your personal culpability.
Rob Dawg | Homepage | 01.06.09 - 9:33 am | #
Or in other words: I can haz moral hazard?
JP | Homepage | 01.06.09 - 9:35 am | #
I just finished reading the comments from Tanta's 2007 post. It is scary just how right I was abouts teh moral hazardz. At that time I was alone in the wilderness as to the severity of what I also called an attractive nuisance. Everything has come to pass. Scary.
Rob Dawg | Homepage | 01.06.09 - 9:47 am | # "
Yes! It seems like Tanta wanted to "punish" lenders with cram-downs, but that totally neglects the borrower's role. It's, to a degree, like the various lawsuits filed against Lynn Ladder Company that punish the company for all of the stupid stuff the ladder buyers did with their ladder, such as erecting them on a sloped roof and then falling and breaking their necks. The last one I bought had >50% of its flat surface area covered with various warning, some so silly that they must have been added after someone did it and then sued. Further to this behavioral pattern, I always get a kick when I read the instructions for our steam iron that warns me not to iron clothes while I'm wearing them. LOL
virgile(Unrated) writes: I don't see the moral hazard. If you bought a $300K house in 2004 that is now worth $150K, your mortgage will be readjusted to $150K meaning that you've lost the down payment plus whatever you've paid over the last few years. You end up with zero net value since you have (value of house)-mortgage).
Had you bought $150k house in 2004 and it was worth $300k today and the fed decided to do a cram-up because the bank should share in the profits, would that be OK too?
Yes, an individual has to file bankruptcy and comply with onerous Chapter 13 payback plans. So much for the theory that it "totally neglects the borrowers' role."
A cramdown is not a wipeout of a mortgage obligation to the current value of the asset. But don't let me interrupt anyone's spittle-flecked bloviations.
Hmmmm... how bout this. Bought a home in 2002 for $150k. Did a cash out refi in 2006 for $300k. Blew the money on hookers and coke (and a hummer) and then in 2009 cant pay your mortgage. Cram that down.
Sorry - I actually came to post about this, but got distracted -
'The sons of Bernard Madoff, who is accused of orchestrating a massive Ponzi scheme, told prosecutors last week that their father violated a court-ordered asset freeze by mailing them jewelry, watches and other items, his lawyer said.
U.S. prosecutors yesterday asked a federal judge to revoke Madoff’s bail because he violated the freeze. U.S. Magistrate Judge Ronald Ellis asked for legal briefs by Jan. 7 from the government and from Madoff, who remains free in his Manhattan apartment on a $10 million bond. ' Madoff Sons Reported Father’s Mailed Gifts of Jewelry (Update1) - Bloomberg.com
Recognizing all the complexity and layering involved, I still think the sons were pretty much straight arrows appalled to discover that their father was Darth Lucas (ooops - wrong myth system).
Nonetheless, it is just another evidence point that the sons do seem to be playing fully within the rule of law that the father, if not the mother too, seem to have flouted for decades.
W00T: Fair point, but as I mentioned, the alternative is foreclosure. As Markel has mentioned, a cramdown actually ends up returning more money to the lender because of the payment plan set up by the court. (Right, Markel?)
" W00T writes:
Hmmmm... how bout this. Bought a home in 2002 for $150k. Did a cash out refi in 2006 for $300k. Blew the money on hookers and coke (and a hummer) and then in 2009 cant pay your mortgage. Cram that down.
W00T | 01.06.09 - 10:07 am | # "
... making it riskier to lend will not increase lending.
The problem was that after the housing bubble had sucked in all the people who actually could repay a loan to buy at the highest prices that could realistically be maintained, the people who were making such fabulous incomes in the mortgage origination pipeline wither had to find some other line of work, or keep on lending -- but to people who couldn't repay and/or were buying at prices that couldn't be maintained.
We know path which they chose. Alas, the all-regulation-is-bad ideology ensured that there was no one to stop them. And the fact that they had earlier gotten Congress to give mortgages special treatment in bankruptcy was one factor in encouraging other people to keep on giving them money to lend.
Less lending -- only to people who actually can and intend to repay, and who are buying at sustainable prices -- is exactly what we need. Eliminating the special status of mortgage lenders in bankruptcy proceedings will be good, not bad.
virgile, I get what you are saying and it makes complete sense from a business standpoint. The "part that makes sense" isnt overriding my desire to see the housing speculators and fraudulent lenders burn though...
Don't homestead exemptions protect the primary residence where they're available? Many folks (in the past) moved to Florida and piled all of their assets into their home for this purpose.
A retired banker told me, if I understood him correctly, that in a cramdown the bank takes the loss out of capital, but if the property is foreclosed, the losses can be written down over a period of years. Because of accounting rules, it's better for a bank to own a foreclosed and hopefully resold house than to negotiate a lower mortgage principal with the present resident or accept a a cramdown. I would think that this legislation could lead to a renegotiation to market price quicker which is the ultimate solution to the mortgage crisis,no?
You have a little more faith than I do. It would be a great feeling to believe that the morally "right" thing to do will prevail. That hasnt happened for a while. It is all about the benjamins.
This will have a bigger impact on credit card issuers and credit card rates.
The portion of the mortgage that is cramed down becomes unsecured debt. The judge then eliminates a portion of the unsecured debt based on the debtors ability to pay.
Since the cramdowns on the house are likely to be a very large number relative to the credit card debt the credit card debt effectively gets wiped out.
The moral hazard part is that this penalizes people who have been renting or saving for an affordable home in a decent school district. Fewer of those homes are going to come on the market.
It is good for individuals who have impaired senses of housing valuation. It is bad for individuals that understand that price/income or price/rent were outrageous.
It takes two (or three) impairesed senses of valuation to create a mortgage, not just the borrower.
Hooray! I can't think of a better way to ensure that mortgage rates soar than forcing banks to include the risk of future cram-downs in their business models. And with soaring rates will come crashing house prices.
Yeah, they'll soar all the way to their historic norms. For the last 7 years they've been artificially low. And we see what that's wrought.
virgile, cramdowns as we used to have them did not automatically reduce, say, an underwater debtor's obligations to the exact amount of the house's value. That's not what a cramdown is.
Today, a reckless mortgage lender enjoys an advantage over other lenders, including other secured lenders, because bankers lobbied for a special exemption. In a BK, creditors' claims all go into a pot, secured and unsecured lenders alike. The total size of the pot is reduced to a level that the debtor can actually pay, under a nasty and stringent repayment plan. The judge decides how much, if any, of the pot each creditor gets. But the mortgage holder for the primary residence holds special immunity talisman which prevents their secured debt from being reduced.
There isn't a rational reason for lenders to want this. It does save them from the embarrassment of writing down the now-fallen value of their collateral immediately. But only temporarily, because if the house goes to FC that's all they get. Most of all, it saves them from having to make sure that future borrowers are actually able to repay their loans. That, I think, is what they're really afraid of. They've pulled back on writing garbage now, but want to preserve the privilege for the future.
In a cramdown, the lender's security can be crammed down to the current value of the house. So if a homeowner owes $300K on a house now worth $100K, a judge can make only $100K of that loan secured by the house. This is not a gimme to the borrower. This is just a recognition of reality; that spare $200K is really no longer secured by that house anyway, and the bank will never recover it from anybody. But that $200K doesn't go away, it's simply deemed unsecured and goes into the pot with all the other debt. The debtor will probably end up paying a portion of it through the repayment plan. So, yes, a bank could conceivably recover more through a cramdown than it would in a FC.
I find it hilarious to read some people's opposition to cramdowns. It punishes borrowers, punishes lenders, and forces an immediate "mark to market" on declining house prices. But it's pushed by Democrats, so it's baaaad. O! The sanctity of contracts!
I can't think of a better way to ensure that mortgage rates soar than forcing banks to include the risk of future cram-downs in their business models.
JP
Why would banks have to include cram-downs in their business models? They didn't include foreclosure risk in their models 2 years ago and they got free taxpayer money as a result. Banks also are not reserving much for credit card defaults. That's because they will not have to pay for them.
"But don't let me interrupt anyone's spittle-flecked bloviations.
Markel | 01.06.09 - 10:06 am | #"
"Such complexity requires a substantial "energy" subsidy (meaning resources, or other forms of wealth). When a society confronts a "problem," such as a shortage of or difficulty in gaining access to energy, it tends to create new layers of bureaucracy, infrastructure, or social class to address the challenge. "
This is such good stuff, part of it needs reposted:
"In fact, I have some sympathy with the view that mortgage lenders perform a valuable social service through their loans." That's why, when they stop doing that and become predators, equity strippers, and bubble-blowers instead of valuable social service providers, I like seeing BK judges slap them around. Everybody talks a lot about moral hazard, and the reality is that you're a lot less likely to put a borrower with a weak credit history, whose income you did not verify and whose debt ratios are absurd, into a 100% financed home purchase loan on terms that are "affordable" only for a year or two, if you face having that loan restructured in Chapter 13. If you are aware that your mortgage loan can be crammed down, I'm here to tell you that you will certainly not "forget" to model negative HPA in your ratings models, and will probably pay more than a few seconds' attention to your appraisals. You might even decide that, if a loan does get into trouble, you're better off working it out yourself, via forbearance or modification or short sale, rather than hanging tough and letting the BK judge tell you what you'll accept. That would be a major bummer, right?"
"The mortgage industry's major lobbying group is coming out and telling you, explicitly, that cram-downs would ruin the party because we'd either have to disclose these bankruptcy-in-the-making loans to "the market" and watch it slap a punitive bid on the things, resulting in a rate the borrowers could never afford, or we'd have to stop making bankruptcy-in-the-making loans. Or perhaps we are being told that the MBA knows of no possible way to screen loan applications to cull out the ones most likely to end up in BK. That's rather a startling point of view from the folks who are supposed to be experts in mortgage lending."
Wow, I just love the way she let them have both banks of photon torpedoes! It would be REALLY entertaining to have these posts read in Congress.
We're now talking about a significant number of folks who did the right thing (in say 2000-2003, much less 2004-2007) but have lost their jobs/livelihoods in the past year due to the excesses of everyone else.
Sorry, but cramdowns won't help them if their mortgage is from 2000-2003. Those mortgages are fairly close to the current market value of the house and the BK judge won't cramdown the principal to whatever the borrower can pay, he'll cram it down to market value. Since the existing mortgage is already close to market value, a say 3% cramdown is meaningless.
Somehow, someway, the debt/credit has to be removed from the financial statements...
This is necessary in order to get the economy going...I am sorry, but the investors will be screwed...no way around it...however, the economy has been taught a lesson, credit is bad!!!
This is what leveraging is all about...You, the investor, screwed up, and now you pay the consequences...
The investor always pays...that is the downside of investing, which they knew or should have known of the possibility...
Well, its happen, your investment has gone south, live with it, that is one of a number of the possible consequences that you should have considered in your calculations...
Being upside down in many cases relates to personal responsibility. Cash out refinancing without extreme hardship never made any sense to those with any sense of discipline.
Had you bought $150k house in 2004 and it was worth $300k today and the fed decided to do a cram-up because the bank should share in the profits, would that be OK too?
Niiiice. Way to miss the point (which is BANKRUPTCY).
Rob Dawg writes:
Your probability of benefitting from the housing bubble is now offically tied to your personal culpability.
The money is gone. It never existed - it is what's left after a bubble bursts. Why not transfer some of the loss to the bond-holders and banksters? It's about f'ing time.
Also, this would send a clear message to the bond-holders and servicers: your bail-outs are over, it's time to get serious on workouts.
The Tanta article CR linked to also explained why this is the right move going forward as well - it re-imposes upon lenders the need for responsible underwriting.
Someone worte above to the effect that the accounting treatments make it better for banks to do a foreclosure than to take a cramdown.
But really, who it's better for is bank management, and stockholders who intend to bail out and sell to someone else (leaving them to fell the effects of the delayed recognition of loss). It's not really "better for the bank".
Hmmmm... how bout this. Bought a home in 2002 for $150k. Did a cash out refi in 2006 for $300k. Blew the money on hookers and coke (and a hummer) and then in 2009 cant pay your mortgage. Cram that down.
Fine by me. If the banks was stupid enough to do that, they DESERVE a cramdown.
Oh, and you'll be bankrupt. For the last decade that hasn't been much of a stigma, but times they are a-changin'.
Who takes the loss? The financial institution. But they have seen this coming, in theory. How do they cover the loss? Currently, by earning something on the spread between mortgage rates and their borrowing rate, which is pretty good right now.
So, ultimately: you know who. The taxpayer.
Does anybody know the mechanics of the cram-down effect on the price of the home? Would the appraisal value or tax value be reset at the cram-down loan level?
[Cramdowns will help get prices down to where they should be, and so will help all those who have been renting and saving for a future purchase.
jm]
Oh, so a FC sale doesn't ? I see that as a weak argument.
Penalizes the prudent prospective buyers and rewards the reckless speculative "purchasers". Let the true market solve the home pricing instead of a BK judge.
And yet, that is already par for the course among the well heeled - just ask around here for some advice how some poor unfortunate family can save 60,000 dollars a year by simply not paying their mortgage, while planning to stay on the same block, because of the children, naturally.
Perhaps you're missing the point. A BK judge will see that as fraud and there won't be a cramdown.
In a BK, creditors' claims all go into a pot, secured and unsecured lenders alike. The total size of the pot is reduced to a level that the debtor can actually pay, under a nasty and stringent repayment plan.
Is that true? I thought the unsecured debt was marked=to-ability-to-pay and the secured debt was marked-to-market.
In a cramdown, the lender's security can be crammed down to the current value of the house.
Unintended consequence:
Now the owner has every incentive to seek a lower price for his/her house. Are you kidding me, my house isn't worth $X dollars; it's only worth $Y dollars. Question is how will this be captured in the comps.
Ironically, it could lead to faster true price discovery. Or a whole positive feedback loop leading to a real ugly overshoot correction.
So if the BK judge crams down the prinicpal and a portion becomes unsecured debt as outlined by some of the posters above, does the lender still retain the right to foreclose on the whole property?? Do they forfeit their foreclosure rights as part of the cramdown??
Because really, such victims of the housing bubble deserve our support and advice in overcoming their unfortunate circumstances, not our scorn or disgust.
You wanna have scorn or disgust? Be my guest. But having scorn for the borrower and not the lender is nothing short of stupidity. It takes two to enter into a bad contract.
I understand the logic - the lender was able to pull a fast one over a willingly stupid borrower. OK, fine; maybe the idiot deserved it. Then us idiots also deserve it when Congress taxes fiscally responsible people at 80%, too. After all, we willingly accepted living in a democracy.
I neither said nor meant to imply that an FC doesn't. Rather, I was writing in response to earlier comments which implied that a cramdown doesn't.
Most people don't know how pricing works in a credit bust...
Prices on houses are sticky. People are either unable (mortgage) or unwilling to list houses for current market prices and instead list them for close to peak values. Of course, those homes sit on the market and are the majority of MLS listings because they don't sell.
The real downward pressure on prices comes from the homes that are have-to-sells. Mostly REO. They come on the market and dissapear fairly quickly because they are at market clearing prices.
This can continue for a long time with inventory of the want-to-sells piling up until the have-to-sells are forced out of the market. Then prices are set by replacement cost (new home construction) and only once the replacement cost exceeds the old peak do existing home prices start going up again and inventory clears.
The cramdowns are going to remove a lot of have-to-sells from the market. The have-to-sells are what create some semblance of a liquid market.
Without a liquid market (outside of the bankruptcy courts) it's going to be pretty hard for lenders to measure risk.
Is that true? I thought the unsecured debt was marked=to-ability-to-pay and the secured debt was marked-to-market.
My understanding is that your car loan's lien, for instance, gets crammed down, or "stripped," to the current value of the car. The remainder of the loan goes into the unsecured pot. But you have to show that you can pay the whole shebang before your plan gets approved.
Basel Too writes:
does the lender still retain the right to foreclose on the whole property??
No, BK operates as an automatic stay on the collection of debt and property to secure debt.
Basel Too | 01.06.09 - 10:58 am | #
Basel--
I guess I meant after the stay is lifted. If the whole point of the cramdown is to divide the outstanding mortgage into secured and unsecured portions, will the lender still be able to foreclose against the property in the future if the borrower fails to make the revised payments?
My understanding is that your car loan's lien, for instance, gets crammed down, or "stripped," to the current value of the car. The remainder of the loan goes into the unsecured pot. But you have to show that you can pay the whole shebang before your plan gets approved.
Yes, that is correct; however, cars purchased with 910 days of filing for BK can't be lien-stripped either.
I think it's worth considering that in a NON cram-down scenario (assuming the owner can't afford their mortgage and they're significantly underwater):
The lender has to go through the process of foreclosure, eviction, cleaning up and prepping house for resale, hiring agent(s), paying fees and closing costs, etc, etc. Lot of time and money in that process.
Once the lender has the house ready for sale, they've got to take what the market price is ANYWAY. So now they're in the same boat as they would have been with a cram-down to market value, minus all the hassle and cost of foreclosing.
I might also mention:
If the owner (debtors) stay in their house, there are knock-on benefits for the neighborhood and the other folks living there, both financial (by somewhat supporting the value of the surrounding houses) and non-financial (go borrow some eggs, drive your neighbor's kid to practice, whatever). Cramming down helps prevent some of the negatives of foreclosing (or walking alway) willy-nilly.
So this is actually beneficial to the lender, IMO. I think what's happening here is that the mortgage bankers are hoping that people will act against their own best interest and do anything possible to keep paying their mortgage, regardless of the market value of the home or the personal sacrifices necessary to service a ridiculous debt burden. They are holding out for this improbable outcome because to admit otherwise would be to instantly bankrupt many of their companies.
In reality, everyone would probably be better off with the cram-down. We're beyond assessing blame at this point, IMO, as there is plenty to go around, so we should concentrate on wasting as little time and effort as possible kicking people out of homes when they can actually afford the true market value of said home. To do otherwise is simply foolish for all parties.
Does this reward foolish behavior? Sure, in some cases that is undoubtedly true. But the benefits to society at large outweigh that moral hazard argument, especially in the era of the massive gov't financial bailout(s).
Am i wrong in assuming that a BK judge who sees a list of assets that include rolex's, jet ski's, boats, and trailers, listed as paid for. That the judge would/could make them sell those to cover losses before any cramdown would be considered. In my experience, they are pretty shrewed about not missing assets when a list of assets comes across the bench blank.
"Charles Kiting writes:
Yes, part of the problem has been too few low-risk borrowers
WTF? Savers are part of the problem?"
No, the problem is they are too few (especially for the size of the mortgage market or level of homeownership that the government artificially decrees--and the gap explains the financial crisis).
Does this reward foolish behavior? Sure, in some cases that is undoubtedly true. But the benefits to society at large outweigh that moral hazard argument, especially in the era of the massive gov't financial bailout(s). Waltworks | Homepage | 01.06.09 - 11:08 am | #
Only if you ignore the future effects on the greater banking system. Some folks might see, say 33%, down payments as a problem.
wouldn't this just accelerate house price declines since home owners can now sell at a lower price and now owe money to the bank? I feel a lot of folks would take that option just to get out of a mortgage payment.
Either the mortgage lenders benefit from cramdowns, or they don't. Borrowers either benefit from cramdowns or they don't. However, something that is being missed here and in the other links is this- what about the other secured/unsecured lenders in a BK? How are the prospects of their recoveries affected by a cramdown? If, as a lot of the cramdown supporters assert, the mortgage lenders and the borrowers both benefit from cramdowns, then someone is bearing the cost.
It seems like the US could avoid a lot of moral hazard, if banks could seek recourse on mortgages. I know that here in Norway, if the market value of your house falls below the mortgage, a lot of banks will declare the portion that's above market value non-secured and charge a higher interest rate on that part. You can't get out of it easily and it helps with discipline.
Oh, so a FC sale doesn't ? I see that as a weak argument.
In theory, an over-supply of foreclosures will overshoot the correction on the price slides.
The reality is that a cramdown won't help in some situations and the borrowers will end up being foreclosed. If a cramdown reduces principal from say 600K to 400K, and the borrower only earns 60K a year, the cramdown does nothing for the lender and therefore the cramdown isn't even an option. Therefore the house is foreclosed.
JM: "Alas, the all-regulation-is-bad ideology ensured that there was no one to stop them. And the fact that they had earlier gotten Congress to give mortgages special treatment in bankruptcy was one factor in encouraging other people to keep on giving them money to lend."
The second sentence disproves the first. Regulation awarded a privilege to a special interest that underpriced risk.
I largely agree with your post. I just found it amusing that Congress is planning to undermine its own goal of increasing lending.
The cramdowns are going to remove a lot of have-to-sells from the market. The have-to-sells are what create some semblance of a liquid market.
Without a liquid market (outside of the bankruptcy courts) it's going to be pretty hard for lenders to measure risk.
What do you mean by "a lot"? Some think it's about 30-40%. Some may think it's 80-90%. If 80-90%, you are correct. If 30-40%, you are wrong.
We've had a 50% drop from peak prices. A borrower getting a loan for 10x annual income would be at 5x income after a theoretical cramdown. That's still uncollectable so the cramdown wouldn't be a viable option and the house becomes a have-to-sell.
This thread could benefit from a real-world example.
Residence 15445 Las Planideras, Rancho Santa Fe CA, 92067. Liens again the property = $6.7M. Zillows at $4.5M. Owner in bk, the court sent paperwork with estimates the "value" of the property to be $7M.
No, the problem is they are too few (especially for the size of the mortgage market or level of homeownership that the government artificially decrees--and the gap explains the financial crisis).
OK, I misunderstood your meaning. My apologies.
There are too few low-risk borrowers for the amount of credit in the market. That means there is an over-supply of credit. The market is in the process of discovering that. The credit-makers have already discovered it, the credit-takers haven't fully discovered it yet - Barney Frank for example.
"Bob writes:
This is exactly what judges had the power to do until recently when banks "helped" pass legislation to make bankruptcy more difficult to attain and debts harder to expunge in court. This is nothing new. It is good for individuals, if that "individual" is not a corporation."
Bob - you are WRONG. Mortgage cramdowns have NEVER been allowed in BK. The BK law change in 2006 did not change this. . .check your facts. Cramdowns have not been allowed because it would crate too much uncertainty in the mortgage business - rates would go up as lenders had to factor in new risks.
ac writes:
So who takes the losses? The lender who made the foolish loan, or the responsible taxpayer who actually pays for the stuff he buys and returns the things he borrows?
Deutsche Bank, who will invariably be holding the worst securitised mortgages, and most European pension funds that gorged themselves on high-yield AAA-rated US paper!
Which is a big hit to the credit card companies...
Yes, but with the exception of pure-credit card companies (e.g. AmEx), the banks are going to be much more impacted by the mortgage writedowns. Also, keep in mind that some credit card debt is non-dischargeable.
Nothing with that filing. Value exceeds secured debt, so there's no excess debt to recognize as unsecured. Fair Economist | Homepage | 01.06.09 - 11:30 am | #
True, but retry the exercise with the court "value" at $4.5M.
Bob - you are WRONG. Mortgage cramdowns have NEVER been allowed in BK. The BK law change in 2006 did not change this. . .check your facts. Cramdowns have not been allowed because it would crate too much uncertainty in the mortgage business - rates would go up as lenders had to factor in new risks.
No, you're wrong. Judges can cram down second houses loans, auto loans, investment loans, rental property loans, pawnshop loans, inventory loans, receivables loans, and virtually any other kind of secured debt except primary residence mortgages. Note that includes all forms of mortgages besides primary residence. They could cram down those too, until a court decision in the 90's allowed enforcement of a previously considered unconstitutional law from the 70's (with no effect on mortgage rates, incidentally).
True, but retry the exercise with the court "value" at $4.5M.
Then up to 2.2M of the mortgage loan can be declared unsecured by the BK judge and go in the payment pot with the cramdown on the vacation home, the cramdown on the SUV, and the credit card debt.
Liens again the property = $6.7M. Zilows at $4.5M. Owner in bk, the court sent paperwork with estimates the "value" of the property to be $7M.
Depends. If there is just a single mortgage on the property, then the mortgage would be bifurcated as 4.5M secured and 2.2M undersecured. If the liens include anything else, then this exercise is futile.
BK discharges the obligation of the borrower to pay the lien, it does not extinguish the lien from the property.
Good luck trying to sell the property even after the cramdown with the liens on it.
It seems like the US could avoid a lot of moral hazard, if banks could seek recourse on mortgages.
True, to an extent.
To get out of the problem of not having recourse, the banks needed to sell those loans to someone who was rich, benevolent, and foolish. Enter Uncle Sam with his daughter Cousin Fannie. Moral Hazard R U.S.
If you are aware of any way to extract blood from a stone, or full mortgage obligation from an underwater house, please do share. Markel | 01.06.09 - 11:46 am | #
I did not say that full value was going to be recovered. But you knew that.
Well... not in west LA, Metro Boston, The city of SF, Coastal Cali, etc. etc. Prices are still in insane-o land in these areas. The only thing that is pushing prices down is the have to sell folks. My fear is that removing these from the market via cramdown or whatever, will result in prices in these areas never getting back to fundamentals. This of course assumes a fairly steady supply of people willing to pay inflated prices. So far, there are, at least in these areas...
Residence 15445 Las Planideras, Rancho Santa Fe CA, 92067.
Liens again the property = $6.7M. Zillows at $4.5M. Owner in bk, the court sent paperwork with estimates the "value" of the property to be $7M.
What is the appropriate cramdown for this house?
Not enough info yet. Need an appraisal, list of other creditors, list of assets, income, etc.
This is a particularly fascinating thread. First there is the barrage of knee-jerk hand-wringing from the 24/7 posters who can't perform sequential thinking with more than two steps. And then the grownups arrive. Thank you Markel for your fine concise explanation of the cramdowns. The people who are worrying that this is somehow going to halt the correction of the housing market are not thinking it through. Nothing will stop the cost of housing from reverting to affordability. Remember: lenders will be tougher. That means fewer qualified buyers. Prices go down. And, please, REOs are NOT the only properties with sellers who need to sell.
Popeye and Markel and Tanta are exactly right on cramdowns.
Every other debt and contract can get crammed down in bankruptcy: pensions, debts, labor contracts, vacation homes. . . . everything but first residences. And the result is a residential mortgage market gone insane
Remember: lenders will be tougher. That means fewer qualified buyers. Prices go down. And, please, REOs are NOT the only properties with sellers who need to sell. flaminia | 01.06.09 - 11:55 am | #
Exactly. As I said in my first post: I cannot think of a better way to ensure that mortgage rates soar than forcing banks to include the risk of future cram-downs in their business models. And with soaring rates will come crashing house prices.
It is my sense that the folks hoping for cramdown legislation do not understand that it is going to lead to much lower overall prices in housing.
Thank you flaminia. And joe, it's just improper to put me in the same sentence as Tanta for any reason.
Some here are BK experts. I'm not, though I did pretty well on it in school back when dinosaurs ruled the earth and law school cafeteria served mastodon. I've forgotten most of what I know, along with the reason why I'm not wearing socks at the moment. Hey, I'm getting older.
I'm simply someone who accepts that he does not already understand every complicated issue on the planet, and so should try to learn just a little something before popping open his blow hole. Apparently this view places me in a vanishingly small minority.
Not enough info yet. Need an appraisal, list of other creditors, list of assets, income, etc. Charles Kiting | 01.06.09 - 11:54 am | #
Use the zillow appraisal. $250K in bank, $100K other tangible assets. Nominal $250K income past twelve months split equally between salary and dividends.
I cannot think of a better way to ensure that mortgage rates soar than forcing banks to include the risk of future cram-downs in their business models.
Soar to WHAT exactly? (OK, you can just guess, I don't expect prescience.)
BK judges don't care about ability to pay or market value. They are playing with other people's money. At the end of the day, they pocket your money (government paycheck) and go home to American Idol.
All the arguments here that cramdowns recognize reality, mark-to-market, discover prices, etc., only highlight that cramdowns accomplish nothing that would not occur anyway without the BK-regulation moral hazard and parasitic court system to implement something that would happen for free without them.
Crammed down to 4.5 million, the income and assets won't support the payment requirements. Into the foreclosure pile it goes! Charles Kiting | 01.06.09 - 12:12 pm | #
And at what minimum income would it not go into the foreclosure pile? Then what cramdown?
it would be useful if those in opposition to a cram down took a moment to think about it. In today's market it is far preferable to have mortgage modification rather than a foreclosure. Given the the securitization that has taken place it is impossible to go a modification- the high risk tranche holders and second mortgage holders have zero reason to agree because they would be wiped out. The only choice is for a court to force the modification.
There are plenty of safeguards that could be built in e.g. the debt holder gets any profit from the sale of the property following a cram down.
In today's market it is far preferable to have mortgage modification rather than a foreclosure. crazyvermonter | 01.06.09 - 12:17 pm | #
Naturally, that depends on where you sit. As one example: Prudent home owners (ie, no mortgage) might object to the institutionalization of rewarding imprudence, which is not captured on a balance sheet. As a non-homeowner, I'm looking forward to it's effect on house prices and bank stocks.
Under normal circumstances, cram-downs might be a big deal. We're not in normal circumstances.
De facto cram-downs are already happening outside of bankruptcy, in the form of loan modifications. So a few more loans will be modified in bankruptcy - that's not going to increase the number significantly. Also, the re-default rate on loan mods is high; cram-downs via bankruptcy are no more likely to prevent foreclosure, IMO, especially as real estate values continue to decline.
Squabbling over cram-downs in bankruptcy is kind of like arguing over who dropped that quarter on the ground and not seeing the pyroclastic flow that's bearing down on both of you.
This of course assumes a fairly steady supply of people willing to pay inflated prices. So far, there are, at least in these areas...
On a personal level, that's my biggest issue with cramdowns. Just as there are have-to-sells there are have-to-buys. People who have sat out (or were forced to sit out) the bubble and now need to move up.
There are relatively few options for families who need an affordable house in a decent school district. Right now, those people have no good choices because the banks and homeowners are waiting for the housing fairy to keep the status quo.
I read Tanta's article about why this is good, and am not convinced. Sure we want the lenders to get kicked in the pants so hard they'll never think about doing this again, but why the benefit for dumbass homeowners that bought more than they could afford? Screw them.
I find it hilarious to read some people's opposition to cramdowns. It punishes borrowers, punishes lenders, and forces an immediate "mark to market" on declining house prices. But it's pushed by Democrats, so it's baaaad. O! The sanctity of contracts!
Markel | 01.06.09 - 10:28 am | #
A one-way street. I'm sure not one of these blowhards bleated about "the sanctity of contracts" when the law was passed that prohibited cramdowns on mortgage debt, thus effectively modifying the terms of all outstanding mortgages.
Bob - you are WRONG. Mortgage cramdowns have NEVER been allowed in BK. The BK law change in 2006 did not change this. . .check your facts. Cramdowns have not been allowed because it would crate too much uncertainty in the mortgage business - rates would go up as lenders had to factor in new risks.
Adam | 01.06.09 - 11:29 am | #
Maybe you should both check your facts. Quoting from Tanta's post:
The prohibition of court-ordered modifications for mortgages on principal residences was created in 1978; between 1978 and 1993 most bankruptcy courts interpreted the law to mean that while interest-rate reduction or term-extension modifications were not allowed, home mortgages could still be crammed down.
In 1993, with Nobleman v. American Savings Bank, the Supreme Court held that the prohibition on modifications of principal-residence mortgage loans also included cram downs. The result is that borrowers who are upside down and who have toxic, high-rate mortgages are simply, in practical terms, unable to maintain their homes in Chapter 13.
The house secures the loan. If the borrower doesn't, can't, won't pay for it, the lender takes the house. That was the law when the loan was written, it is the law now, and should be the law for the remainder of the loan term. A new law can be made to apply to new loans but I see real constitutional issues and major lawsuits if such a new law is applied to existing contracts.
I didn't read the entire Reuters article, but I find the timing somewhat amusing - Cramdown legislation moves ahead a week after the FDIC finds a creative way to unload IndyMac.
Would've been a lot more entertaining to see an IndyMac loan crammed down while the FDIC was still in charge. The BK judge could ponder out loud why the lender didn't propose a better workout.
I'm not a lawyer. I do, however, retain a great RE atty. We talked about this several months ago and deceided we will run screaming as loud and as far as we can if a cramdown law is passed that affects mtgs. I hold.
Let me have my pound of flesh.
Let the cramp down begin.
Let the mortgage rate sour.
Let the down payment requirement raise above 40%.
Let the house price comes down affordable level like $200K for 3000 sqft in bay area.
I will pay full in cash and will have little left in the bank earning 10%+ interest.
It is high time they compensate me for stealing from me(saver).
It will come and pass.
This is going to wipe out current US paper wealth by at least 75%.
I fear the outcome; but the idiots at every level trying their best without realization to reset entire economical and financial system as we know it.
"Hmmmm... how bout this. Bought a home in 2002 for $150k. Did a cash out refi in 2006 for $300k. Blew the money on hookers and coke (and a hummer) and then in 2009 cant pay your mortgage. Cram that down."
CRAM DOWNS!!! please let hundreds of lawyers and judges take away my bad decisions and inability to manage my financial life! this is a big WTF! there will be no consistency in the approach and results and i feel it is a direct result of the re-defaulting loan mods... and beyond all of this... it will be extremely costly to manage and account for. what a f'n mess. I doubt any one of us could count on one hand the # of publicly elected officials that really know what they are talking about when it comes to mortgage
I read Tanta's article about why this is good, and am not convinced. Sure we want the lenders to get kicked in the pants so hard they'll never think about doing this again, but why the benefit for dumbass homeowners that bought more than they could afford? Screw them.
You don't think they're getting screwed already? Have you ever known someone who declared Chap. 13 and had to live through a repayment plan? Believe me, it's not exactly a life of wine, women, and song.
These folks are bankrupt. That's what Chapter 13 means. They'll be subject to a period of forced austerity foreign to most commenters on this board. Their credit rating will get nuked. And, in many cases (certainly all of the ones I've been privy to personally), it will probably destroy their marriage and most of their close friendships as well.
If that's living high on the moral hazard hog, how about I sign you up for a spell?
Black Star Ranch writes:
....what happens if I as a homeowner and seller decide to carry the mortgage myself. Can some judge decrease the amount a buyer is supposed to pay me for a home I sold them?
In theory, yes. If you did a seller-financing first mortgage to someone without assets or decent credit, then you took a risk that you would lose $$ even if you took the property back. Price that risk correctly, and finance responsibly, and you can manage that risk.
Here, with a cramdown, you still have some security, which is better than most of the other creditors.
Your mileage may vary based on whether you are in a title theory or lien theory state, but that is getting out in the weeds pretty far. Call your friendly neighborhood bankruptcy attorney for details.
And although I am no bankruptcy jock myself, I would point out that Tanta and most commenters are missing the main point of cramdowns: It is not a matter of fairness to the debtor, or giving a sucker an even break (Heaven forfend!) It is about fairness between creditors, and having an orderly sorting out of assets between creditors of different asset classes. The cramdown offsets some advantages held by secured creditors, but allows for a hell of a lot more to be paid to other creditors in the long run.
And the basis of the cramdown is not what the debtor can afford, but what the security is really worth. The the debtor is hopeless, get a lawyer to push him into Chapter 7 and get permission to foreclose.
I am not for any bailouts but "if" there are write downs on mortgages they should come with a lien attached to the property in the amount of the write down. Homeowners who take advantage of such progams and later sell their properties should not be able to profit until that write down is repaid.
Cram-down will result in a huge frenzy of new appraisal fraud to show the market value of properties is lower than it is. And while preparing to game the system (again), make sure to rack up as much dischargable credit card debt as possible, perpetuating another wave of credit crisis.
There is an alternative- allow judges to modify current balances, but require that the banks or taxpayers are given equity participation in future appreciation, up to the balance.
It makes absolutely no sense from any policy perspective to give that future appreciation option to the debtors.
One issue is that the homeowners do not have an incentive to make major improvements since they are sharing in the upside. But I don't think most of the upside down people are short of granite countertops in anyway.
If you want to stay in your home, equity participation would help you. If you are looking to make a killing on future appreciation, it won't help you very much.
WTF!?
Let's just retroactively abolish all debts entirely. Problem solved!
Your probability of benefitting from the housing bubble is now offically tied to your personal culpability.
TAKE THE MARKET ON THAT!!!!!!!!!!!!!!!
Folks,
What exactly us a cram-down? Is it just another means of keeping folks from having to pay for their bad investments?
I wrote this in the previous thread, but it belongs in this one:
Hooray! I can't think of a better way to ensure that mortgage rates soar than forcing banks to include the risk of future cram-downs in their business models. And with soaring rates will come crashing house prices.
This is exactly what judges had the power to do until recently when banks "helped" pass legislation to make bankruptcy more difficult to attain and debts harder to expunge in court. This is nothing new. It is good for individuals, if that "individual" is not a corporation.
Your probability of benefitting from the housing bubble is now offically tied to your personal culpability.
Rob Dawg | Homepage | 01.06.09 - 9:33 am | #
Or in other words: I can haz moral hazard?
xxxxx,
RTFM
Calculated Risk: Just Say Yes To Cram Downs
Nemo writes:
Let's just retroactively abolish all debts entirely. Problem solved!
Good example of the quality of CR's blog!
Sweet! So this means I should stop paying my mortgage now?
It is good for individuals,
Bob | Homepage | 01.06.09 - 9:35 am | #
It is good for individuals who have impaired senses of housing valuation. It is bad for individuals that understand that price/income or price/rent were outrageous.
It is also bad for future mortgages, which will have higher rates in order to prepare for future cram-downs. (But it is great for cash buyers, who will benefit from the lower prices due to higher rates.)
So who takes the losses? The lender who made the foolish loan, or the responsible taxpayer who actually pays for the stuff he buys and returns the things he borrows?
"citizen energyecon writes:
xxxxx,
RTFM ;-)"
Actually, JP's and Rob Dawg's were, IMHO, much more informative and appropriate, with appologies to Tanta.
JP, please read Tanta's article referenced to answer all your concerns.
Hmmm, now that the Fed/Treasury are in deep to lenders it's the perfect time to do cramdowns and apply the losses by a haircut to the govt tally.
Rally time!
Cram downs should only happen without lender consent if the 'homeowner' can prove apprisal fraud was likely.
.
It is unbelievable that cram-downs are even considered. They definitely won't work. If someone is so upside down that they can't pay their bills, will a 10-20% reduction in their mortgage change their situation?
Hooray! I can't think of a better way to ensure that mortgage rates soar than forcing banks to include the risk of future cram-downs in their business models. And with soaring rates will come crashing house prices.
Why don't you, and some others in this thread, take a precious moment to read Tanta's excellent pieces on cram downs, rather than pontificating loudly on topics you know nothing about?
Actually, JP's and Rob Dawg's were, IMHO, much more informative and appropriate, with appologies to Tanta.
xxxxx | 01.06.09 - 9:40 am | #
I would have said that we were more pithy than Tanta. But pithiness was nowhere near next to Godliness with her, which was of course a part of her charm.
Hmmmm...
"The legislation would change allow bankruptcy judges to modify home loans in the same way that they currently may modify other unsettled obligations, such as credit card debt."
I thought mortgages were secured by real property...or is credit card debt a secured loan and I missed that some where?
CC cram downs are designed to keep lender from losing all on unsecured debt. My understanding of a mortgage is that the lender believed the real properties value was worth the loan ammount, and thus would take said real property in case of default...and said borrower agreed to said terms.
I see no reason to change the rules in the middle of the game to benefit either party to that contract.
Perhaps if this passes the Fed can buy like a gajillion $ in mortgage debt...you know...to keep markets "liquid".
Nostrovia,
....what happens if I as a homeowner and seller decide to carry the mortgage myself. Can some judge decrease the amount a buyer is supposed to pay me for a home I sold them?
JP, please read Tanta's article referenced to answer all your concerns.
Second that advice.
I learned some time ago that when someone who's smarter (or at least more informed) than I takes the opposite side of an argument from me - especially as concerns a field in which that person is an expert - I'd better ask myself 'why?' before spouting off my two cents.
Tanta, to engage in a bit of understatement, certainly qualifies on that score.
That's all I'll say, for now.
Folks, we're past the point where the cramdowns are going to be happening entirely to benefit credit-glutted idiots. We're now talking about a significant number of folks who did the right thing (in say 2000-2003, much less 2004-2007) but have lost their jobs/livelihoods in the past year due to the excesses of everyone else.
Furthermore, (this may be naive) but I'd certainly hope that any BK judge, having taken a close look at the debtor's financial choices on their road to ruin, would use some judgment in deciding whether a mortgage modification would be a sensible way to get them back to financial health.
Let's just retroactively abolish all debts entirely. Problem solved!
I have to agree. The easiest way to solve the foreclosure problem is just have judges eliminate all mortgages everywhere. Then everyone has a house, tons of extra spending money, and the economy is back on track.
So simple.
Black Star Ranch,
"Can some judge decrease the amount a buyer is supposed to pay me for a home I sold them?"
Erm...Yeah...why not? Your contract terms are now all belong to the judge.
Nostrovia,
Why can't we just cut interest rates again?
.
Your probability of benefitting from the housing bubble is now offically tied to your personal culpability.
Rob Dawg | Homepage | 01.06.09 - 9:33 am | #
Or in other words: I can haz moral hazard?
JP | Homepage | 01.06.09 - 9:35 am | #
I just finished reading the comments from Tanta's 2007 post. It is scary just how right I was abouts teh moral hazardz. At that time I was alone in the wilderness as to the severity of what I also called an attractive nuisance. Everything has come to pass. Scary.
Why can't we just cut interest rates again?
Broward Horne | Homepage | 01.06.09 - 9:47 am | #
I'm waiting for the Fed program that lowers interest rates so far that they pay you to live in the house.
....what happens if I as a homeowner and seller decide to carry the mortgage myself. Can some judge decrease the amount a buyer is supposed to pay me for a home I sold them?
This is an outstanding question. And can you, as seller, then apply for TARP funds?
It's clear that we need a Judge Czar.
"Hooray! I can't think of a better way to ensure that mortgage rates soar than forcing banks to include the risk of future cram-downs in their business models. And with soaring rates will come crashing house prices.
JP | Homepage | 01.06.09 - 9:34 am | # "
....if I sell a home AND carry it - the proceeds of which are to finance my retirement, and some judge changes the terms of what the buyer pays me?
That's not right. Plain & simple.
So what happens if the mortgage is securitized by fannie or freddie?
That's not right. Plain & simple.
And your point is what?
.
BondsOfSteel writes:
Cram downs should only happen without lender consent if the 'homeowner' can prove apprisal fraud was likely.
Tanta: Everybody talks a lot about moral hazard, and the reality is that you're a lot less likely to put a borrower with a weak credit history, whose income you did not verify and whose debt ratios are absurd, into a 100% financed home purchase loan on terms that are "affordable" only for a year or two, if you face having that loan restructured in Chapter 13.
That's not right. Plain & simple.
Black Star Ranch | 01.06.09 - 9:51 am | #
Heh.... why are you different than any other mortgage-backed security investor?
....nothing....(mutter, mutter, mutter)
Cramdowns are a shitty idea.
Cram downs are like rebating the tickets on the Titanic after the iceberg has been hit. Got to keep the steerage class pacified while the upper decks grab the lifeboats.
Just keep in mind - the homeowner doesn't get to make the decision on the cramdown - the judge does. So I wouldn't stop paying on the mortgage just yet.
Of course the idea sticks in everyone's craw, but there aren't going to be any easy, pleasant solutions to this mess. We went through this whole thing here a year ago. Like almost everyone, I started off shocked and appalled at the idea. However, I found Tanta's posts to be persuasive, and grudgingly came around to the idea that in bankruptcy, under the administration of a judge, cramdowns might sometimes be appropriate.
bearly writes:
Cramdowns are a shitty idea.
Deuteronomy 15:1
I don't see the moral hazard. If you bought a $300K house in 2004 that is now worth $150K, your mortgage will be readjusted to $150K meaning that you've lost the down payment plus whatever you've paid over the last few years. You end up with zero net value since you have (value of house)-mortgage).
Alternatively, you can go into foreclosure and still have zero net value (no house)-(no mortgage).
"Hooray! I can't think of a better way to ensure that mortgage rates soar than forcing banks to include the risk of future cram-downs in their business models. And with soaring rates will come crashing house prices.
JP | Homepage | 01.06.09 - 9:34 am | # "
Yes, part of the problem has been too few low-risk borrowers, and making it riskier to lend will not increase lending.
This Congress is going to be a doozy.
"ac writes:
So who takes the losses? The lender who made the foolish loan, or the responsible taxpayer who actually pays for the stuff he buys and returns the things he borrows?"
After the last year, do you have to ask?
Perhaps to comment in this thread, you should be required to explain what cramdowns are. It's clear that not many commenters know.
..."This Congress is going to be a doozy."
I think it might actually provide some comic relief. The economy can't be helped - may as well laugh as Atlanta burns
Cramdown - "two men enter, one man leave!"
Congress is considering retroactively making Nemo first for this thread.
I just finished reading the comments from Tanta's 2007 post.
Rob Dawg | Homepage | 01.06.09 - 9:47 am | #
Wow, the memories! Geez, seems like when we lost Tanta we also lost Bacon Dreamz & MaxedOutMama too.
" Rob Dawg writes:
Your probability of benefitting from the housing bubble is now offically tied to your personal culpability.
Rob Dawg | Homepage | 01.06.09 - 9:33 am | #
Or in other words: I can haz moral hazard?
JP | Homepage | 01.06.09 - 9:35 am | #
I just finished reading the comments from Tanta's 2007 post. It is scary just how right I was abouts teh moral hazardz. At that time I was alone in the wilderness as to the severity of what I also called an attractive nuisance. Everything has come to pass. Scary.
Rob Dawg | Homepage | 01.06.09 - 9:47 am | # "
Yes! It seems like Tanta wanted to "punish" lenders with cram-downs, but that totally neglects the borrower's role. It's, to a degree, like the various lawsuits filed against Lynn Ladder Company that punish the company for all of the stupid stuff the ladder buyers did with their ladder, such as erecting them on a sloped roof and then falling and breaking their necks. The last one I bought had >50% of its flat surface area covered with various warning, some so silly that they must have been added after someone did it and then sued. Further to this behavioral pattern, I always get a kick when I read the instructions for our steam iron that warns me not to iron clothes while I'm wearing them. LOL
Markel, U 1st pleez
Question: In order to get a cram down, doesn't the individual have to file for bankruptcy?
We have to eliminate debt in order to move forward...What's wrong if they file BK?
Quite the Cram-Up going on in the markets this morning.
virgile(Unrated) writes:
I don't see the moral hazard. If you bought a $300K house in 2004 that is now worth $150K, your mortgage will be readjusted to $150K meaning that you've lost the down payment plus whatever you've paid over the last few years. You end up with zero net value since you have (value of house)-mortgage).
Had you bought $150k house in 2004 and it was worth $300k today and the fed decided to do a cram-up because the bank should share in the profits, would that be OK too?
" Popeye writes:
bearly writes:
Cramdowns are a shitty idea.
Deuteronomy 15:1
Popeye | 01.06.09 - 9:56 am | # "
Wasn't that Dude-oronomy
Yes, an individual has to file bankruptcy and comply with onerous Chapter 13 payback plans. So much for the theory that it "totally neglects the borrowers' role."
A cramdown is not a wipeout of a mortgage obligation to the current value of the asset. But don't let me interrupt anyone's spittle-flecked bloviations.
Anyone buying SKF at these levels?
How much higher/longer can this bounce go?
Disclosure: Still in oil (canroy's) - enjoying the bounce from the Christmas bottoms.
Hmmmm... how bout this. Bought a home in 2002 for $150k. Did a cash out refi in 2006 for $300k. Blew the money on hookers and coke (and a hummer) and then in 2009 cant pay your mortgage. Cram that down.
How much higher/longer can this bounce go?
Interesting Times | 01.06.09 - 10:07 am | #
Quite a ways, actually.
Sorry - I actually came to post about this, but got distracted -
'The sons of Bernard Madoff, who is accused of orchestrating a massive Ponzi scheme, told prosecutors last week that their father violated a court-ordered asset freeze by mailing them jewelry, watches and other items, his lawyer said.
U.S. prosecutors yesterday asked a federal judge to revoke MadoffÂ’s bail because he violated the freeze. U.S. Magistrate Judge Ronald Ellis asked for legal briefs by Jan. 7 from the government and from Madoff, who remains free in his Manhattan apartment on a $10 million bond. '
Madoff Sons Reported Father’s Mailed Gifts of Jewelry (Update1) - Bloomberg.com
Recognizing all the complexity and layering involved, I still think the sons were pretty much straight arrows appalled to discover that their father was Darth Lucas (ooops - wrong myth system).
Nonetheless, it is just another evidence point that the sons do seem to be playing fully within the rule of law that the father, if not the mother too, seem to have flouted for decades.
Quite the Cram-Up going on in the markets this morning.
ac | 01.06.09 - 10:04 am | #
I think today's little run-up is just about over, though.
Comrade Bear (tj & the bear) - do you think we will see 10k before 7k again ?
To me, it seems plausable.
"spittle-flecked bloviations"...........I'm saving that....[eg]
W00T: Fair point, but as I mentioned, the alternative is foreclosure. As Markel has mentioned, a cramdown actually ends up returning more money to the lender because of the payment plan set up by the court. (Right, Markel?)
do you think we will see 10k before 7k again
Interesting Times | 01.06.09 - 10:09 am | #
Yeah, I do. However, the next leg down won't be stopping at 7k.
" W00T writes:
Hmmmm... how bout this. Bought a home in 2002 for $150k. Did a cash out refi in 2006 for $300k. Blew the money on hookers and coke (and a hummer) and then in 2009 cant pay your mortgage. Cram that down.
W00T | 01.06.09 - 10:07 am | # "
How did you find out about that!
... making it riskier to lend will not increase lending.
The problem was that after the housing bubble had sucked in all the people who actually could repay a loan to buy at the highest prices that could realistically be maintained, the people who were making such fabulous incomes in the mortgage origination pipeline wither had to find some other line of work, or keep on lending -- but to people who couldn't repay and/or were buying at prices that couldn't be maintained.
We know path which they chose. Alas, the all-regulation-is-bad ideology ensured that there was no one to stop them. And the fact that they had earlier gotten Congress to give mortgages special treatment in bankruptcy was one factor in encouraging other people to keep on giving them money to lend.
Less lending -- only to people who actually can and intend to repay, and who are buying at sustainable prices -- is exactly what we need. Eliminating the special status of mortgage lenders in bankruptcy proceedings will be good, not bad.
Yeah, I do. However, the next leg down won't be stopping at 7k.
Thanks. And yup, I don't feel the market is done the big purge yet.
NEW POST! Man, I just love that pig. Thanks again, Ken!
virgile, I get what you are saying and it makes complete sense from a business standpoint. The "part that makes sense" isnt overriding my desire to see the housing speculators and fraudulent lenders burn though...
Don't homestead exemptions protect the primary residence where they're available? Many folks (in the past) moved to Florida and piled all of their assets into their home for this purpose.
W00T: I'd like to think that maybe there is a 10th circle of hell for those people
They won't get punished in this life for sure.
Very unlikely a judge would order a cramdown on a second taken out in order to buy drugs and prostitutes.
Cramdown is an invention of the command economy contingent.
Let's see. A cash-out purchase on inflated appraisal and the purchaser gets to keep his monster TV, boat and memories of the 2 week Disney Cruise ?
A retired banker told me, if I understood him correctly, that in a cramdown the bank takes the loss out of capital, but if the property is foreclosed, the losses can be written down over a period of years. Because of accounting rules, it's better for a bank to own a foreclosed and hopefully resold house than to negotiate a lower mortgage principal with the present resident or accept a a cramdown. I would think that this legislation could lead to a renegotiation to market price quicker which is the ultimate solution to the mortgage crisis,no?
Cram it baby! Give those illegals with mortgages a break!
You have a little more faith than I do. It would be a great feeling to believe that the morally "right" thing to do will prevail. That hasnt happened for a while. It is all about the benjamins.
Deuteronomy 15:1
Popeye | 01.06.09 - 9:56 am | #
Why such good odds on the old cat from CATS?
..higher mortgage rates
This will have a bigger impact on credit card issuers and credit card rates.
The portion of the mortgage that is cramed down becomes unsecured debt. The judge then eliminates a portion of the unsecured debt based on the debtors ability to pay.
Since the cramdowns on the house are likely to be a very large number relative to the credit card debt the credit card debt effectively gets wiped out.
The moral hazard part is that this penalizes people who have been renting or saving for an affordable home in a decent school district. Fewer of those homes are going to come on the market.
It is good for individuals who have impaired senses of housing valuation. It is bad for individuals that understand that price/income or price/rent were outrageous.
It takes two (or three) impairesed senses of valuation to create a mortgage, not just the borrower.
I for one request that we appoint a Cram Down Czar with fully operational department level authority.
How else are we going to absorb 600,000 new gubermint employees in the next six months....I say get on widd it.
If someone is so upside down that they can't pay their bills,
Being upside-down has NOTHING to do with ability to pay. Being upside-down MAY have something to do with WILLINGNESS to pay. Big difference.
ooooooooohhh, them AAPL shorts really got their huevos caught in a monster ball-squeeze. Ouch.
The banks don't have any money for this. Does anyone know WHERE they might get the money for this?
Hey, what's that sound??
Hooray! I can't think of a better way to ensure that mortgage rates soar than forcing banks to include the risk of future cram-downs in their business models. And with soaring rates will come crashing house prices.
Yeah, they'll soar all the way to their historic norms. For the last 7 years they've been artificially low. And we see what that's wrought.
virgile, cramdowns as we used to have them did not automatically reduce, say, an underwater debtor's obligations to the exact amount of the house's value. That's not what a cramdown is.
Today, a reckless mortgage lender enjoys an advantage over other lenders, including other secured lenders, because bankers lobbied for a special exemption. In a BK, creditors' claims all go into a pot, secured and unsecured lenders alike. The total size of the pot is reduced to a level that the debtor can actually pay, under a nasty and stringent repayment plan. The judge decides how much, if any, of the pot each creditor gets. But the mortgage holder for the primary residence holds special immunity talisman which prevents their secured debt from being reduced.
There isn't a rational reason for lenders to want this. It does save them from the embarrassment of writing down the now-fallen value of their collateral immediately. But only temporarily, because if the house goes to FC that's all they get. Most of all, it saves them from having to make sure that future borrowers are actually able to repay their loans. That, I think, is what they're really afraid of. They've pulled back on writing garbage now, but want to preserve the privilege for the future.
In a cramdown, the lender's security can be crammed down to the current value of the house. So if a homeowner owes $300K on a house now worth $100K, a judge can make only $100K of that loan secured by the house. This is not a gimme to the borrower. This is just a recognition of reality; that spare $200K is really no longer secured by that house anyway, and the bank will never recover it from anybody. But that $200K doesn't go away, it's simply deemed unsecured and goes into the pot with all the other debt. The debtor will probably end up paying a portion of it through the repayment plan. So, yes, a bank could conceivably recover more through a cramdown than it would in a FC.
I find it hilarious to read some people's opposition to cramdowns. It punishes borrowers, punishes lenders, and forces an immediate "mark to market" on declining house prices. But it's pushed by Democrats, so it's baaaad. O! The sanctity of contracts!
I can't think of a better way to ensure that mortgage rates soar than forcing banks to include the risk of future cram-downs in their business models.
JP
Why would banks have to include cram-downs in their business models? They didn't include foreclosure risk in their models 2 years ago and they got free taxpayer money as a result. Banks also are not reserving much for credit card defaults. That's because they will not have to pay for them.
"But don't let me interrupt anyone's spittle-flecked bloviations.
Markel | 01.06.09 - 10:06 am | #"
"Such complexity requires a substantial "energy" subsidy (meaning resources, or other forms of wealth). When a society confronts a "problem," such as a shortage of or difficulty in gaining access to energy, it tends to create new layers of bureaucracy, infrastructure, or social class to address the challenge. "
Joseph Tainter - Wikipedia, the free encyclopedia
This is such good stuff, part of it needs reposted:
"In fact, I have some sympathy with the view that mortgage lenders perform a valuable social service through their loans." That's why, when they stop doing that and become predators, equity strippers, and bubble-blowers instead of valuable social service providers, I like seeing BK judges slap them around. Everybody talks a lot about moral hazard, and the reality is that you're a lot less likely to put a borrower with a weak credit history, whose income you did not verify and whose debt ratios are absurd, into a 100% financed home purchase loan on terms that are "affordable" only for a year or two, if you face having that loan restructured in Chapter 13. If you are aware that your mortgage loan can be crammed down, I'm here to tell you that you will certainly not "forget" to model negative HPA in your ratings models, and will probably pay more than a few seconds' attention to your appraisals. You might even decide that, if a loan does get into trouble, you're better off working it out yourself, via forbearance or modification or short sale, rather than hanging tough and letting the BK judge tell you what you'll accept. That would be a major bummer, right?"
"The mortgage industry's major lobbying group is coming out and telling you, explicitly, that cram-downs would ruin the party because we'd either have to disclose these bankruptcy-in-the-making loans to "the market" and watch it slap a punitive bid on the things, resulting in a rate the borrowers could never afford, or we'd have to stop making bankruptcy-in-the-making loans. Or perhaps we are being told that the MBA knows of no possible way to screen loan applications to cull out the ones most likely to end up in BK. That's rather a startling point of view from the folks who are supposed to be experts in mortgage lending."
Wow, I just love the way she let them have both banks of photon torpedoes! It would be REALLY entertaining to have these posts read in Congress.
We're now talking about a significant number of folks who did the right thing (in say 2000-2003, much less 2004-2007) but have lost their jobs/livelihoods in the past year due to the excesses of everyone else.
Sorry, but cramdowns won't help them if their mortgage is from 2000-2003. Those mortgages are fairly close to the current market value of the house and the BK judge won't cramdown the principal to whatever the borrower can pay, he'll cram it down to market value. Since the existing mortgage is already close to market value, a say 3% cramdown is meaningless.
...would use some judgment in deciding whether a mortgage modification would be a sensible way to get them back to financial health.
A BK judge's job is not to be a financial planner for the bankrupt, his job is to secure whatever monies he/she can for the creditors.
Essentially the market is doing the cramdown already, all a BK judge does is make every party admit it in public.
Somehow, someway, the debt/credit has to be removed from the financial statements...
This is necessary in order to get the economy going...I am sorry, but the investors will be screwed...no way around it...however, the economy has been taught a lesson, credit is bad!!!
This is what leveraging is all about...You, the investor, screwed up, and now you pay the consequences...
The investor always pays...that is the downside of investing, which they knew or should have known of the possibility...
Well, its happen, your investment has gone south, live with it, that is one of a number of the possible consequences that you should have considered in your calculations...
Hey, Its not personal, it's business...
Being upside down in many cases relates to personal responsibility. Cash out refinancing without extreme hardship never made any sense to those with any sense of discipline.
Yes, part of the problem has been too few low-risk borrowers
WTF? Savers are part of the problem?
markel's 10:28 am post is exactly on the mark.
Cramdowns will help get prices down to where they should be, and so will help all those who have been renting and saving for a future purchase.
Markel, thanks for the explanation. That does confirm my view that cramdowns make a lot of sense.
Had you bought $150k house in 2004 and it was worth $300k today and the fed decided to do a cram-up because the bank should share in the profits, would that be OK too?
Niiiice. Way to miss the point (which is BANKRUPTCY).
Rob Dawg writes:
Your probability of benefitting from the housing bubble is now offically tied to your personal culpability.
The money is gone. It never existed - it is what's left after a bubble bursts. Why not transfer some of the loss to the bond-holders and banksters? It's about f'ing time.
Also, this would send a clear message to the bond-holders and servicers: your bail-outs are over, it's time to get serious on workouts.
The Tanta article CR linked to also explained why this is the right move going forward as well - it re-imposes upon lenders the need for responsible underwriting.
Someone worte above to the effect that the accounting treatments make it better for banks to do a foreclosure than to take a cramdown.
But really, who it's better for is bank management, and stockholders who intend to bail out and sell to someone else (leaving them to fell the effects of the delayed recognition of loss). It's not really "better for the bank".
Hmmmm... how bout this. Bought a home in 2002 for $150k. Did a cash out refi in 2006 for $300k. Blew the money on hookers and coke (and a hummer) and then in 2009 cant pay your mortgage. Cram that down.
Fine by me. If the banks was stupid enough to do that, they DESERVE a cramdown.
Oh, and you'll be bankrupt. For the last decade that hasn't been much of a stigma, but times they are a-changin'.
Who takes the loss? The financial institution. But they have seen this coming, in theory. How do they cover the loss? Currently, by earning something on the spread between mortgage rates and their borrowing rate, which is pretty good right now.
So, ultimately: you know who. The taxpayer.
Does anybody know the mechanics of the cram-down effect on the price of the home? Would the appraisal value or tax value be reset at the cram-down loan level?
[Cramdowns will help get prices down to where they should be, and so will help all those who have been renting and saving for a future purchase.
jm]
Oh, so a FC sale doesn't ? I see that as a weak argument.
Penalizes the prudent prospective buyers and rewards the reckless speculative "purchasers". Let the true market solve the home pricing instead of a BK judge.
I would think that this legislation could lead to a renegotiation to market price quicker which is the ultimate solution to the mortgage crisis,no?
Hooray! Someone actually thinking (a skill) than simply emoting (not a skill).
Oh, so a FC sale doesn't ? I see that as a weak argument.
I neither said nor meant to imply that an FC doesn't. Rather, I was writing in response to earlier comments which implied that a cramdown doesn't.
And yet, that is already par for the course among the well heeled - just ask around here for some advice how some poor unfortunate family can save 60,000 dollars a year by simply not paying their mortgage, while planning to stay on the same block, because of the children, naturally.
Perhaps you're missing the point. A BK judge will see that as fraud and there won't be a cramdown.
In a BK, creditors' claims all go into a pot, secured and unsecured lenders alike. The total size of the pot is reduced to a level that the debtor can actually pay, under a nasty and stringent repayment plan.
Is that true? I thought the unsecured debt was marked=to-ability-to-pay and the secured debt was marked-to-market.
We need a Cram Down Czar.
I nominate anybody named "Ralph". Ralph Cram-down. I like that.
In a cramdown, the lender's security can be crammed down to the current value of the house.
Unintended consequence:
Now the owner has every incentive to seek a lower price for his/her house. Are you kidding me, my house isn't worth $X dollars; it's only worth $Y dollars. Question is how will this be captured in the comps.
Ironically, it could lead to faster true price discovery. Or a whole positive feedback loop leading to a real ugly overshoot correction.
So if the BK judge crams down the prinicpal and a portion becomes unsecured debt as outlined by some of the posters above, does the lender still retain the right to foreclose on the whole property?? Do they forfeit their foreclosure rights as part of the cramdown??
Cram down czar -
what about Jim Cram-er
does the lender still retain the right to foreclose on the whole property??
No, BK operates as an automatic stay on the collection of debt and property to secure debt.
Because really, such victims of the housing bubble deserve our support and advice in overcoming their unfortunate circumstances, not our scorn or disgust.
You wanna have scorn or disgust? Be my guest. But having scorn for the borrower and not the lender is nothing short of stupidity. It takes two to enter into a bad contract.
I understand the logic - the lender was able to pull a fast one over a willingly stupid borrower. OK, fine; maybe the idiot deserved it. Then us idiots also deserve it when Congress taxes fiscally responsible people at 80%, too. After all, we willingly accepted living in a democracy.
It's the same logic. And it's half-assed logic.
I neither said nor meant to imply that an FC doesn't. Rather, I was writing in response to earlier comments which implied that a cramdown doesn't.
Most people don't know how pricing works in a credit bust...
Prices on houses are sticky. People are either unable (mortgage) or unwilling to list houses for current market prices and instead list them for close to peak values. Of course, those homes sit on the market and are the majority of MLS listings because they don't sell.
The real downward pressure on prices comes from the homes that are have-to-sells. Mostly REO. They come on the market and dissapear fairly quickly because they are at market clearing prices.
This can continue for a long time with inventory of the want-to-sells piling up until the have-to-sells are forced out of the market. Then prices are set by replacement cost (new home construction) and only once the replacement cost exceeds the old peak do existing home prices start going up again and inventory clears.
The cramdowns are going to remove a lot of have-to-sells from the market. The have-to-sells are what create some semblance of a liquid market.
Without a liquid market (outside of the bankruptcy courts) it's going to be pretty hard for lenders to measure risk.
Is that true? I thought the unsecured debt was marked=to-ability-to-pay and the secured debt was marked-to-market.
My understanding is that your car loan's lien, for instance, gets crammed down, or "stripped," to the current value of the car. The remainder of the loan goes into the unsecured pot. But you have to show that you can pay the whole shebang before your plan gets approved.
How does the market realize the cramdown amount thus the value of these houses.
Basel Too writes:
does the lender still retain the right to foreclose on the whole property??
No, BK operates as an automatic stay on the collection of debt and property to secure debt.
Basel Too | 01.06.09 - 10:58 am | #
Basel--
I guess I meant after the stay is lifted. If the whole point of the cramdown is to divide the outstanding mortgage into secured and unsecured portions, will the lender still be able to foreclose against the property in the future if the borrower fails to make the revised payments?
...will the lender still be able to foreclose against the property in the future if the borrower fails to make the revised payments?
Yes, they can foreclose on what is left of the secured debt.
will the lender still be able to foreclose against the property in the future if the borrower fails to make the revised payments?
Yes, the secured lien stays with the property until it is paid off. But in that situation, the borrower will then convert to Chap 7 liquidation.
[Without a liquid market (outside of the bankruptcy courts) it's going to be pretty hard for lenders to measure risk.
Kicker ]
Excellent assessment.
Cash out refinancing without extreme hardship never made any sense to those with any sense of discipline.
I'll take it a step further:
30-year mortgages never made any sense to those with any sense of financial discipline.
I'm in agreement that cash-outs became a new, foolish standard that turned into a sacred cow. 30-year mortgages became sacred cows, too.
My understanding is that your car loan's lien, for instance, gets crammed down, or "stripped," to the current value of the car. The remainder of the loan goes into the unsecured pot. But you have to show that you can pay the whole shebang before your plan gets approved.
Yes, that is correct; however, cars purchased with 910 days of filing for BK can't be lien-stripped either.
BAPCPA Blog: Strip-Tease? No More Stripping Down Many Auto Loans
I think it's worth considering that in a NON cram-down scenario (assuming the owner can't afford their mortgage and they're significantly underwater):
I might also mention:
So this is actually beneficial to the lender, IMO. I think what's happening here is that the mortgage bankers are hoping that people will act against their own best interest and do anything possible to keep paying their mortgage, regardless of the market value of the home or the personal sacrifices necessary to service a ridiculous debt burden. They are holding out for this improbable outcome because to admit otherwise would be to instantly bankrupt many of their companies.
In reality, everyone would probably be better off with the cram-down. We're beyond assessing blame at this point, IMO, as there is plenty to go around, so we should concentrate on wasting as little time and effort as possible kicking people out of homes when they can actually afford the true market value of said home. To do otherwise is simply foolish for all parties.
Does this reward foolish behavior? Sure, in some cases that is undoubtedly true. But the benefits to society at large outweigh that moral hazard argument, especially in the era of the massive gov't financial bailout(s).
-Walt
Markel,
Am i wrong in assuming that a BK judge who sees a list of assets that include rolex's, jet ski's, boats, and trailers, listed as paid for. That the judge would/could make them sell those to cover losses before any cramdown would be considered. In my experience, they are pretty shrewed about not missing assets when a list of assets comes across the bench blank.
"Charles Kiting writes:
Yes, part of the problem has been too few low-risk borrowers
WTF? Savers are part of the problem?"
No, the problem is they are too few (especially for the size of the mortgage market or level of homeownership that the government artificially decrees--and the gap explains the financial crisis).
But the benefits to society at large outweigh that moral hazard argument, especially in the era of the massive gov't financial bailout(s).
I think one lesson to be learned from this crisis is that "it's all about the inflection point." Something is good until it's not.
Does this reward foolish behavior? Sure, in some cases that is undoubtedly true. But the benefits to society at large outweigh that moral hazard argument, especially in the era of the massive gov't financial bailout(s).
Waltworks | Homepage | 01.06.09 - 11:08 am | #
Only if you ignore the future effects on the greater banking system. Some folks might see, say 33%, down payments as a problem.
wouldn't this just accelerate house price declines since home owners can now sell at a lower price and now owe money to the bank? I feel a lot of folks would take that option just to get out of a mortgage payment.
Either the mortgage lenders benefit from cramdowns, or they don't. Borrowers either benefit from cramdowns or they don't. However, something that is being missed here and in the other links is this- what about the other secured/unsecured lenders in a BK? How are the prospects of their recoveries affected by a cramdown? If, as a lot of the cramdown supporters assert, the mortgage lenders and the borrowers both benefit from cramdowns, then someone is bearing the cost.
It seems like the US could avoid a lot of moral hazard, if banks could seek recourse on mortgages. I know that here in Norway, if the market value of your house falls below the mortgage, a lot of banks will declare the portion that's above market value non-secured and charge a higher interest rate on that part. You can't get out of it easily and it helps with discipline.
Oh, so a FC sale doesn't ? I see that as a weak argument.
In theory, an over-supply of foreclosures will overshoot the correction on the price slides.
The reality is that a cramdown won't help in some situations and the borrowers will end up being foreclosed. If a cramdown reduces principal from say 600K to 400K, and the borrower only earns 60K a year, the cramdown does nothing for the lender and therefore the cramdown isn't even an option. Therefore the house is foreclosed.
I want to cram down my principal too. What's wrong with that ?
what about the other secured/unsecured lenders in a BK?
Generally, this will affect all unsecured creditors as their pro-rata share of the pot gets decreased by the amount of the principal underwater.
JM: "Alas, the all-regulation-is-bad ideology ensured that there was no one to stop them. And the fact that they had earlier gotten Congress to give mortgages special treatment in bankruptcy was one factor in encouraging other people to keep on giving them money to lend."
The second sentence disproves the first. Regulation awarded a privilege to a special interest that underpriced risk.
I largely agree with your post. I just found it amusing that Congress is planning to undermine its own goal of increasing lending.
The cramdowns are going to remove a lot of have-to-sells from the market. The have-to-sells are what create some semblance of a liquid market.
Without a liquid market (outside of the bankruptcy courts) it's going to be pretty hard for lenders to measure risk.
What do you mean by "a lot"? Some think it's about 30-40%. Some may think it's 80-90%. If 80-90%, you are correct. If 30-40%, you are wrong.
We've had a 50% drop from peak prices. A borrower getting a loan for 10x annual income would be at 5x income after a theoretical cramdown. That's still uncollectable so the cramdown wouldn't be a viable option and the house becomes a have-to-sell.
This thread could benefit from a real-world example.
Residence 15445 Las Planideras, Rancho Santa Fe CA, 92067.
Liens again the property = $6.7M. Zillows at $4.5M. Owner in bk, the court sent paperwork with estimates the "value" of the property to be $7M.
What is the appropriate cramdown for this house?
Generally, this will affect all unsecured creditors as their pro-rata share of the pot gets decreased by the amount of the principal underwater.
Which is a big hit to the credit card companies...
"Liens again the property = $6.7M. Zillows at $4.5M. Owner in bk, the court sent paperwork with estimates the "value" of the property to be $7M.
What is the appropriate cramdown for this house?"
Whatever it takes to keep him in his home! We must protect the millionaires, former millionaires, and pretend millionaires.
Kicker,
My apologies, I now see that you had brought up the issue of the other creditors.
No, the problem is they are too few (especially for the size of the mortgage market or level of homeownership that the government artificially decrees--and the gap explains the financial crisis).
OK, I misunderstood your meaning. My apologies.
There are too few low-risk borrowers for the amount of credit in the market. That means there is an over-supply of credit. The market is in the process of discovering that. The credit-makers have already discovered it, the credit-takers haven't fully discovered it yet - Barney Frank for example.
"Bob writes:
This is exactly what judges had the power to do until recently when banks "helped" pass legislation to make bankruptcy more difficult to attain and debts harder to expunge in court. This is nothing new. It is good for individuals, if that "individual" is not a corporation."
Bob - you are WRONG. Mortgage cramdowns have NEVER been allowed in BK. The BK law change in 2006 did not change this. . .check your facts. Cramdowns have not been allowed because it would crate too much uncertainty in the mortgage business - rates would go up as lenders had to factor in new risks.
Liens again the property = $6.7M. Zillows at $4.5M. Owner in bk, the court sent paperwork with estimates the "value" of the property to be $7M.
What is the appropriate cramdown for this house?
Nothing with that filing. Value exceeds secured debt, so there's no excess debt to recognize as unsecured.
ac writes:
So who takes the losses? The lender who made the foolish loan, or the responsible taxpayer who actually pays for the stuff he buys and returns the things he borrows?
Deutsche Bank, who will invariably be holding the worst securitised mortgages, and most European pension funds that gorged themselves on high-yield AAA-rated US paper!
Which is a big hit to the credit card companies...
Yes, but with the exception of pure-credit card companies (e.g. AmEx), the banks are going to be much more impacted by the mortgage writedowns. Also, keep in mind that some credit card debt is non-dischargeable.
Nothing with that filing. Value exceeds secured debt, so there's no excess debt to recognize as unsecured.
Fair Economist | Homepage | 01.06.09 - 11:30 am | #
True, but retry the exercise with the court "value" at $4.5M.
Bob - you are WRONG. Mortgage cramdowns have NEVER been allowed in BK. The BK law change in 2006 did not change this. . .check your facts. Cramdowns have not been allowed because it would crate too much uncertainty in the mortgage business - rates would go up as lenders had to factor in new risks.
No, you're wrong. Judges can cram down second houses loans, auto loans, investment loans, rental property loans, pawnshop loans, inventory loans, receivables loans, and virtually any other kind of secured debt except primary residence mortgages. Note that includes all forms of mortgages besides primary residence. They could cram down those too, until a court decision in the 90's allowed enforcement of a previously considered unconstitutional law from the 70's (with no effect on mortgage rates, incidentally).
True, but retry the exercise with the court "value" at $4.5M.
Then up to 2.2M of the mortgage loan can be declared unsecured by the BK judge and go in the payment pot with the cramdown on the vacation home, the cramdown on the SUV, and the credit card debt.
Liens again the property = $6.7M. Zilows at $4.5M. Owner in bk, the court sent paperwork with estimates the "value" of the property to be $7M.
Depends. If there is just a single mortgage on the property, then the mortgage would be bifurcated as 4.5M secured and 2.2M undersecured. If the liens include anything else, then this exercise is futile.
BK discharges the obligation of the borrower to pay the lien, it does not extinguish the lien from the property.
Good luck trying to sell the property even after the cramdown with the liens on it.
I guess I'm amazed that folks believe that cramming $2.2M down the bank's throat (which is now the taxpayer, of course) is the right thing to do.
I guess I'm amazed that folks believe that cramming $2.2M down the bank's throat (which is now the taxpayer, of course) is the right thing to do
If you are aware of any way to extract blood from a stone, or full mortgage obligation from an underwater house, please do share.
It seems like the US could avoid a lot of moral hazard, if banks could seek recourse on mortgages.
True, to an extent.
To get out of the problem of not having recourse, the banks needed to sell those loans to someone who was rich, benevolent, and foolish. Enter Uncle Sam with his daughter Cousin Fannie. Moral Hazard R U.S.
If you are aware of any way to extract blood from a stone, or full mortgage obligation from an underwater house, please do share.
Markel | 01.06.09 - 11:46 am | #
I did not say that full value was going to be recovered. But you knew that.
"We've had a 50% drop from peak prices."
Well... not in west LA, Metro Boston, The city of SF, Coastal Cali, etc. etc. Prices are still in insane-o land in these areas. The only thing that is pushing prices down is the have to sell folks. My fear is that removing these from the market via cramdown or whatever, will result in prices in these areas never getting back to fundamentals. This of course assumes a fairly steady supply of people willing to pay inflated prices. So far, there are, at least in these areas...
Residence 15445 Las Planideras, Rancho Santa Fe CA, 92067.
Liens again the property = $6.7M. Zillows at $4.5M. Owner in bk, the court sent paperwork with estimates the "value" of the property to be $7M.
What is the appropriate cramdown for this house?
Not enough info yet. Need an appraisal, list of other creditors, list of assets, income, etc.
You DO know that a $4.5M house is not typical.
This is a particularly fascinating thread. First there is the barrage of knee-jerk hand-wringing from the 24/7 posters who can't perform sequential thinking with more than two steps. And then the grownups arrive. Thank you Markel for your fine concise explanation of the cramdowns. The people who are worrying that this is somehow going to halt the correction of the housing market are not thinking it through. Nothing will stop the cost of housing from reverting to affordability. Remember: lenders will be tougher. That means fewer qualified buyers. Prices go down. And, please, REOs are NOT the only properties with sellers who need to sell.
Popeye and Markel and Tanta are exactly right on cramdowns.
Every other debt and contract can get crammed down in bankruptcy: pensions, debts, labor contracts, vacation homes. . . . everything but first residences. And the result is a residential mortgage market gone insane
Remember: lenders will be tougher. That means fewer qualified buyers. Prices go down. And, please, REOs are NOT the only properties with sellers who need to sell.
flaminia | 01.06.09 - 11:55 am | #
Exactly. As I said in my first post: I cannot think of a better way to ensure that mortgage rates soar than forcing banks to include the risk of future cram-downs in their business models. And with soaring rates will come crashing house prices.
It is my sense that the folks hoping for cramdown legislation do not understand that it is going to lead to much lower overall prices in housing.
Thank you flaminia. And joe, it's just improper to put me in the same sentence as Tanta for any reason.
Some here are BK experts. I'm not, though I did pretty well on it in school back when dinosaurs ruled the earth and law school cafeteria served mastodon. I've forgotten most of what I know, along with the reason why I'm not wearing socks at the moment. Hey, I'm getting older.
I'm simply someone who accepts that he does not already understand every complicated issue on the planet, and so should try to learn just a little something before popping open his blow hole. Apparently this view places me in a vanishingly small minority.
Not enough info yet. Need an appraisal, list of other creditors, list of assets, income, etc.
Charles Kiting | 01.06.09 - 11:54 am | #
Use the zillow appraisal. $250K in bank, $100K other tangible assets. Nominal $250K income past twelve months split equally between salary and dividends.
I cannot think of a better way to ensure that mortgage rates soar than forcing banks to include the risk of future cram-downs in their business models.
Soar to WHAT exactly? (OK, you can just guess, I don't expect prescience.)
Nominal $250K income past twelve months
Crammed down to 4.5 million, the income and assets won't support the payment requirements. Into the foreclosure pile it goes!
Charles Kiting, we agree.
BK judges don't care about ability to pay or market value. They are playing with other people's money. At the end of the day, they pocket your money (government paycheck) and go home to American Idol.
All the arguments here that cramdowns recognize reality, mark-to-market, discover prices, etc., only highlight that cramdowns accomplish nothing that would not occur anyway without the BK-regulation moral hazard and parasitic court system to implement something that would happen for free without them.
Crammed down to 4.5 million, the income and assets won't support the payment requirements. Into the foreclosure pile it goes!
Charles Kiting | 01.06.09 - 12:12 pm | #
And at what minimum income would it not go into the foreclosure pile? Then what cramdown?
it would be useful if those in opposition to a cram down took a moment to think about it. In today's market it is far preferable to have mortgage modification rather than a foreclosure. Given the the securitization that has taken place it is impossible to go a modification- the high risk tranche holders and second mortgage holders have zero reason to agree because they would be wiped out. The only choice is for a court to force the modification.
There are plenty of safeguards that could be built in e.g. the debt holder gets any profit from the sale of the property following a cram down.
In today's market it is far preferable to have mortgage modification rather than a foreclosure.
crazyvermonter | 01.06.09 - 12:17 pm | #
Naturally, that depends on where you sit.
As one example: Prudent home owners (ie, no mortgage) might object to the institutionalization of rewarding imprudence, which is not captured on a balance sheet.
As a non-homeowner, I'm looking forward to it's effect on house prices and bank stocks.
Under normal circumstances, cram-downs might be a big deal. We're not in normal circumstances.
De facto cram-downs are already happening outside of bankruptcy, in the form of loan modifications. So a few more loans will be modified in bankruptcy - that's not going to increase the number significantly. Also, the re-default rate on loan mods is high; cram-downs via bankruptcy are no more likely to prevent foreclosure, IMO, especially as real estate values continue to decline.
Squabbling over cram-downs in bankruptcy is kind of like arguing over who dropped that quarter on the ground and not seeing the pyroclastic flow that's bearing down on both of you.
This of course assumes a fairly steady supply of people willing to pay inflated prices. So far, there are, at least in these areas...
On a personal level, that's my biggest issue with cramdowns. Just as there are have-to-sells there are have-to-buys. People who have sat out (or were forced to sit out) the bubble and now need to move up.
There are relatively few options for families who need an affordable house in a decent school district. Right now, those people have no good choices because the banks and homeowners are waiting for the housing fairy to keep the status quo.
I read Tanta's article about why this is good, and am not convinced. Sure we want the lenders to get kicked in the pants so hard they'll never think about doing this again, but why the benefit for dumbass homeowners that bought more than they could afford? Screw them.
I find it hilarious to read some people's opposition to cramdowns. It punishes borrowers, punishes lenders, and forces an immediate "mark to market" on declining house prices. But it's pushed by Democrats, so it's baaaad. O! The sanctity of contracts!
Markel | 01.06.09 - 10:28 am | #
A one-way street. I'm sure not one of these blowhards bleated about "the sanctity of contracts" when the law was passed that prohibited cramdowns on mortgage debt, thus effectively modifying the terms of all outstanding mortgages.
Bob - you are WRONG. Mortgage cramdowns have NEVER been allowed in BK. The BK law change in 2006 did not change this. . .check your facts. Cramdowns have not been allowed because it would crate too much uncertainty in the mortgage business - rates would go up as lenders had to factor in new risks.
Adam | 01.06.09 - 11:29 am | #
Maybe you should both check your facts. Quoting from Tanta's post:
The prohibition of court-ordered modifications for mortgages on principal residences was created in 1978; between 1978 and 1993 most bankruptcy courts interpreted the law to mean that while interest-rate reduction or term-extension modifications were not allowed, home mortgages could still be crammed down.
In 1993, with Nobleman v. American Savings Bank, the Supreme Court held that the prohibition on modifications of principal-residence mortgage loans also included cram downs. The result is that borrowers who are upside down and who have toxic, high-rate mortgages are simply, in practical terms, unable to maintain their homes in Chapter 13.
The house secures the loan. If the borrower doesn't, can't, won't pay for it, the lender takes the house. That was the law when the loan was written, it is the law now, and should be the law for the remainder of the loan term. A new law can be made to apply to new loans but I see real constitutional issues and major lawsuits if such a new law is applied to existing contracts.
I see real constitutional issues and major lawsuits if such a new law is applied to existing contracts.
Ooo, the law scholars weigh in!
I'm laughing so hard I think I pooped a little.
I didn't read the entire Reuters article, but I find the timing somewhat amusing - Cramdown legislation moves ahead a week after the FDIC finds a creative way to unload IndyMac.
Would've been a lot more entertaining to see an IndyMac loan crammed down while the FDIC was still in charge. The BK judge could ponder out loud why the lender didn't propose a better workout.
let's force bad deals of the past into better deals today by lowering secured loan values to the value of collateral!
we must reward irrational behavior for the benefit of all!
Retroactively!!!!!!!
I'm not a lawyer. I do, however, retain a great RE atty. We talked about this several months ago and deceided we will run screaming as loud and as far as we can if a cramdown law is passed that affects mtgs. I hold.
Markel, Basel Too, and others. Thank you for your posts, you've contributed to my education.
I don't like the idea of cramdowns, but I appreciate the amount of time you spent explaining them. They are beginning to make more sense to me now.
Let me have my pound of flesh.
Let the cramp down begin.
Let the mortgage rate sour.
Let the down payment requirement raise above 40%.
Let the house price comes down affordable level like $200K for 3000 sqft in bay area.
I will pay full in cash and will have little left in the bank earning 10%+ interest.
It is high time they compensate me for stealing from me(saver).
It will come and pass.
This is going to wipe out current US paper wealth by at least 75%.
I fear the outcome; but the idiots at every level trying their best without realization to reset entire economical and financial system as we know it.
"Hmmmm... how bout this. Bought a home in 2002 for $150k. Did a cash out refi in 2006 for $300k. Blew the money on hookers and coke (and a hummer) and then in 2009 cant pay your mortgage. Cram that down."
CRAM DOWNS!!! please let hundreds of lawyers and judges take away my bad decisions and inability to manage my financial life! this is a big WTF! there will be no consistency in the approach and results and i feel it is a direct result of the re-defaulting loan mods... and beyond all of this... it will be extremely costly to manage and account for. what a f'n mess. I doubt any one of us could count on one hand the # of publicly elected officials that really know what they are talking about when it comes to mortgage
I read Tanta's article about why this is good, and am not convinced. Sure we want the lenders to get kicked in the pants so hard they'll never think about doing this again, but why the benefit for dumbass homeowners that bought more than they could afford? Screw them.
You don't think they're getting screwed already? Have you ever known someone who declared Chap. 13 and had to live through a repayment plan? Believe me, it's not exactly a life of wine, women, and song.
These folks are bankrupt. That's what Chapter 13 means. They'll be subject to a period of forced austerity foreign to most commenters on this board. Their credit rating will get nuked. And, in many cases (certainly all of the ones I've been privy to personally), it will probably destroy their marriage and most of their close friendships as well.
If that's living high on the moral hazard hog, how about I sign you up for a spell?
Black Star Ranch writes:
....what happens if I as a homeowner and seller decide to carry the mortgage myself. Can some judge decrease the amount a buyer is supposed to pay me for a home I sold them?
In theory, yes. If you did a seller-financing first mortgage to someone without assets or decent credit, then you took a risk that you would lose $$ even if you took the property back. Price that risk correctly, and finance responsibly, and you can manage that risk.
Here, with a cramdown, you still have some security, which is better than most of the other creditors.
Your mileage may vary based on whether you are in a title theory or lien theory state, but that is getting out in the weeds pretty far. Call your friendly neighborhood bankruptcy attorney for details.
And although I am no bankruptcy jock myself, I would point out that Tanta and most commenters are missing the main point of cramdowns: It is not a matter of fairness to the debtor, or giving a sucker an even break (Heaven forfend!) It is about fairness between creditors, and having an orderly sorting out of assets between creditors of different asset classes. The cramdown offsets some advantages held by secured creditors, but allows for a hell of a lot more to be paid to other creditors in the long run.
And the basis of the cramdown is not what the debtor can afford, but what the security is really worth. The the debtor is hopeless, get a lawyer to push him into Chapter 7 and get permission to foreclose.
All debt that is, except student loans.
I am not for any bailouts but "if" there are write downs on mortgages they should come with a lien attached to the property in the amount of the write down. Homeowners who take advantage of such progams and later sell their properties should not be able to profit until that write down is repaid.
Cram-down will result in a huge frenzy of new appraisal fraud to show the market value of properties is lower than it is. And while preparing to game the system (again), make sure to rack up as much dischargable credit card debt as possible, perpetuating another wave of credit crisis.
There is an alternative- allow judges to modify current balances, but require that the banks or taxpayers are given equity participation in future appreciation, up to the balance.
It makes absolutely no sense from any policy perspective to give that future appreciation option to the debtors.
One issue is that the homeowners do not have an incentive to make major improvements since they are sharing in the upside. But I don't think most of the upside down people are short of granite countertops in anyway.
If you want to stay in your home, equity participation would help you. If you are looking to make a killing on future appreciation, it won't help you very much.