April 30, 2009

JustQuotes: SocketSite Says...The Senate Gets One Right (So Far)

"The U.S. Senate rejected legislation letting U.S. bankruptcy judges cut mortgage terms to help borrowers avoid foreclosure, a victory for banks and credit unions that said the measure would lead to higher loan costs."

Senate Defeats Mortgage ‘Cram-Down’ as Democrats Balk [Bloomberg]

First Published: April 30, 2009 2:00 PM

Comments from "Plugged In" Readers

really? have you thought your stance through? if so, I for one, would love to hear your reasoning...

since you are editorializing here, allow me to do the same

and since i'm a 'poor' thinker, I'll let the late Tanta do my bidding:


Is it possible that BK judges would use the lowest plausible "distressed liquidation value" to determine the secured part of the mortgage loan? Sure it is. BK judges don't have parts of their job descriptions that refer to supporting home values or keeping those comps up or controlling "price discovery." The cram down is, precisely, the "mark to market" you don't want to get, which is why the risk of it used to function as a brake on lender stupidity.

I am fully in favor of removing restrictions on modifications of mortgage loans in Chapter 13, but not necessarily because that helps current borrowers out of a jam. I'm in favor of it because I think it will be part of a range of regulatory and legal changes that will help prevent future borrowers from getting into a lot of jams, which is to say that it will, contra MBA, actually help "stabilize" the residential mortgage market in the long term. Any industry that wants special treatment under the law because of the socially vital nature of its services needs to offer socially viable services, and since the industry has displayed no ability or willingness to quit partying on its own, then treat it like any other partier under BK law.

and again:


To be perfectly honest, I'm not especially impressed with the rationale given for the cram-down proposal. I'm not convinced that 600,000 families are going to flock to Chapter 13 if the bill passes and end up financially better off and still in possession of their homes as a result. Most likely, they'll either be financially better off or still in possession of their homes, but not both. I support the bill, nonetheless, because giving residential mortgage lenders preferential treatment in BK proceedings has not worked out well for us, and if it takes the threat of cram-downs to sober everyone up on credit standards and pricing, then let's get on with it. At the very least we ought to be able to force the MBA to come clean on its rhetoric.

Let's be clear - cram downs have some seriously negative side effects. I'm not thrilled with the idea of bankruptcy being used to shed one's responsibilities - but ask yourself this, who is really being protected by keeping cram downs away? If your answer is 'the real estate industry' you are correct sir. Future homeowners might have to pay a higher rate if cram downs were possible, but that is a GOOD thing.

I'm befuddled by your stance on this, ed.

Posted by: polip at April 30, 2009 2:37 PM

I think it is consistent with the current tone of this site that anything that is bad news for current home-owners is good. Preventing cram-downs on owner-occupied homes is good for FUTURE mortgage borrowers in that it will keep rates lower (since it helps protect lenders from the risk of their bad decisions/poor underwriting).

Posted by: Rillion at April 30, 2009 2:53 PM

My understanding (could be wrong) was that the current draft of the bill would have only allowed cram-downs of existing mortgages, not any new ones. So the risk would have been "sunk" with lenders and would not materially have increased new borrowers' costs. That also would have mooted Tanta's point that the RE industry needs a slap to force tighter lending standards.

I agree with the broader position that there is no reason to treat creditors holding mortgages more favorably than any other creditor in a bankruptcy -- just a sop to the banking industry. And I don't think huge numbers would flock to the extremely invasive bankruptcy process to get a (maybe, hoped for) modification. And bankruptcy judges rarely make these calls -- it is all done by agreement between creditor and debtor, and you know who has the upper hand in that negotiation.

Ultimately, I'm coming around to LMRiM's thesis that the entire process is designed to keep as many people as possible paying as much as possible on these declining assets to reduce exposure for the banks/taxpayers. This latest move furthers that as it eliminates yet another homeowner out, albeit one that I don't think would have had an enormous impact.

Posted by: Trip at April 30, 2009 2:54 PM

Senator Dick Durbin early this week: "And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place."

Posted by: Rillion at April 30, 2009 2:59 PM

so. ... if I go into bankruptcy, a judge can modify the principal on every debt that I owe ... except for a mortgage?

isn't this an exception? why not let the judges treat it like every other debt? it won't be the apocalypse.

straight politics

Posted by: huh? at April 30, 2009 3:02 PM

Trip - I basically agree with every single thing you said.

I should have been clearer and mentioned that while the current legislation would only have applied to current loans, the precedent of restoring cram downs would likely have led to 'gasp' actual risk assessment by banks going forward in making home loans. Even without cram downs available for future loans, banks would have seen the writing on the wall. Now, it's business as usual. They still hold the power.

Rillion - I actually think cram downs are bad for current home owners. Nothing depresses property values quite like active price discovery. While foreclosures function to do so, the presence of cram downs would offer yet another glimpse into the reality of prices at present.

If it were true that current SFH prices in SF were down 10%, a cram down could be expected to show that, as it would mark the outstanding prinicipal down by this percentage (assuming a fair assessment by the BK judge). So, actually, perversely, cram downs are in some way bad for homeowners in the short run (since very few will file for BK but many will 'suffer' the price discovery) but very good for the homeowner class in the long run (less credit frothiness, better lending standards, proper home valuations etc).

Posted by: polip at April 30, 2009 3:04 PM

Ah, polip, that's a clever point -- that most current SF homeowners don't want the price discovery cram-downs would offer because that would reveal the extent of the "loss" in their investment! Of course, that information would ultimately be good for them so they could make reasonable decisions on how to deal with the now "known" mark-to-market value. But they'd rather just not know! Same reason there are stacks of unopened 401(k) statements sitting in desk drawers. I think that is (perversely) exactly right. So this is a win-win for the banks and homeowners (except those that actually want a modification)!

Posted by: Trip at April 30, 2009 3:15 PM

Trip - it is definitely a win for the banks (LMRiM's trap thesis)

It seems like a win for homeowners - but it is not - it just creates more confusion/opacity. Loss aversion is much easier if you can avoid seeing the loss. Unfortunately, loss aversion creates bad financial decisions...

Posted by: polip at April 30, 2009 3:19 PM

Yes and no. Wouldn't cram downs result in fewer foreclosures and fewer forced sales? Sure it causes people and banks to recognize the reality of a decline in housing prices, but fewer foreclosures and fewer distressed sales will reduce the supply of homes for sale.

Posted by: Rillion at April 30, 2009 3:22 PM

Rillion - I disagree - sorry to use Tanta again, but she writes much better than I ever could:

"What this really means is that a successful cram-down would tell the investors in mortgage-backed securities that people can prove to a judge that 1) they cannot afford the mortgages they have and 2) the current value of the home is nowhere near the amount of the mortgage and 3) they do not, actually, want to just "walk away." (Nobody sane who really didn't care about keeping the home would subject themselves to a Chapter 13 just to get a cram-down; they'd mail in the keys.)"

Jingle mail makes much more sense for those wanting to save their hides. The reason cram downs really hurt home values is that they don't allow for all of the nonsense about how foreclosures are not 'true' sales comps to enter into the analysis. A cram down tells it like it is - the value produced from a cram down is produced from a homeowner who wants to stay, but can't and is willing to suffer the financial consequences of sticking it out. They just want to pay what they can and what the market says their home is worth...

Sticking with Tanta one last time:

"I'm not convinced that 600,000 families are going to flock to Chapter 13 if the bill passes and end up financially better off and still in possession of their homes as a result. Most likely, they'll either be financially better off or still in possession of their homes, but not both."

you can have one or the other, but not both...

Posted by: polip at April 30, 2009 3:38 PM

First, on Durbin:

"These bankers who brought us into this crisis ...."

Whoa. No bank forced anyone to buy a house or take on a mortgage. Homedebtors did that of their own volition, so his theatrics are misplaced. Like saying the greedy distillers are to blame for alcoholism; nobody forces people to drink in the first place, let alone drink in excess.

But to the point - if I understand it correctly, the plan was to allow bankruptcy judges to restructure mortgages and allow people to stay in their homes. But only for those folks who are ALREADY in or anticipating bankruptcy. I may be mistaken, but the majority of foreclosures today are not BK related. In other words, people try to short sell, then dump the house and go rent across the street for less, without filing BK to discharge other debt, which they may stay current on. Isn't this generally the case?

This law would have allowed judges to restructure mortgages to what people can afford, which may or may not be the fair market value. Example: Joe CultCab bought a $1 million condo when he made $200K a year. He got laid off, found a new job making $75K a year, but had to go BK and wants to keep his place. Similar condos are selling for $800K today. So how do you restructure the mortgage(s) so that he can stay, and does it foster true price discovery?

Posted by: Legacy Dude at April 30, 2009 3:56 PM

I bow my head to LMRiM.

Posted by: tipster at April 30, 2009 3:59 PM

Legacy Dude - it does foster price discovery, because, assuming the Bk judge acts prudently, s/he would decrease the outstanding principal to match the value of the home. If the homeowner who wnats to stay still cannot make the payments, then too bad - the house is lost = foreclosure.

The purpose of the cram down is not to achieve financial bliss for the homeowner (barring a wacko BK judge). It is to have the homeowner discharge that part of his home loan debt that is no longer c/w market values. If then the home can be kept in the homeowners hands, great, if not, then the home will be liquidated to feed the bank that made the loan.

The game is simple - do everything possible to keep home values inflated. It's your benevolent gov't at work!

Posted by: polip at April 30, 2009 4:07 PM

The cram-down bill had problems, but there are good arguments for legislating a mandatory term in all mortgage-secured loans (and giving the legislation retroactive effect) that would require the loan principal to be written down automatically if it falls below the estimated FMV of the asset that secures the loan. The point is to avoid the deadweight losses associated with foreclosure.

For a concrete proposal along these lines (and a cogent defense of the idea) from some market-minded professors at U. Chicago,
see http://www.thebigmoney.com/articles/mothers-milk/2009/03/03/better-cheaper-mortgage-fix (the popular version) and http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1349364 (the academic version).

Posted by: cse at April 30, 2009 4:15 PM

I don’t have any problem with a judge reducing “unsecured” debt in BK, but it does not make any sense to reduce “secured” debt. If I buy a new GT3 and don’t pay on the loan Porsche should be able to send out a repo man to get it so they can try and get top dollar for the car (say detail it and sell it off the showroom floor with an extended warrantee).

If a homeowner does not pay on a home loan the lender should have the option (I don’t have any problems with lenders reducing loan amounts on their own) of taking the home back so they can do what they want to get top dollar for the home (say fixing the broken windows, painting over the yellow and blue exterior paint or taking the skateboards off the walls)…

Posted by: FormerAptBroker at April 30, 2009 4:20 PM

"so. ... if I go into bankruptcy, a judge can modify the principal on every debt that I owe ... except for a mortgage?

isn't this an exception? why not let the judges treat it like every other debt? it won't be the apocalypse.

straight politics"

Dude, you so don't get it.

The deal is, loans for your first and second (and third...) vacation homes, and all your boats, can be modified by the bankruptcy judge. Even if you had the bad luck to need bankruptcy, due to all those assets, you qualify as elite & you deserve special treatment. The poor idjits who could only afford one home are the ones we feed to the banks, aka predatory lenders.

Them that's got shall get. That's the American way!

Posted by: lark at April 30, 2009 4:22 PM

"barring a wacko BK judge"

That's my fear, though. That you'll get unwritten guidance handed to BK judges to give people 50% principal reductions on their loans to prevent foreclosures and let them keep their American dreams. Or turn around and sell them at a profit once the ink dries.

Maybe I'm paranoid, but I just find it hard to believe that the people backing this measure are truly in search of price discovery (more like re-election discovery, IMO).

Posted by: Legacy Dude at April 30, 2009 4:29 PM

"assuming the Bk judge acts prudently,"

That's some assumption there. You willing to hang your hat on THAT?

Good laws provide clear structure. If we are giving someone arbitrary power to make this decision without such guidance, it shouldn't be law.

IANAL (as if it weren't obvious)

Posted by: Usually Named at April 30, 2009 4:43 PM

Cram downs would be fine with one modification.

Publish the amount that the property has been crammed down to. If anyone offers more than that within 30 days they get the property.

Posted by: diemos at April 30, 2009 4:48 PM

Funny, the Naked Capitalism coverage is titled:

Bankruptcy Cramdown Defeated: Banksters Again Prevail Over Real Economy

Perhaps our editor is a major bondholder? :P

Posted by: Robert at April 30, 2009 4:50 PM

Thanks for the kind words, guys. I never had any doubt that the banksters would prevail. I can't say that I've predicted every twist and turn in this saga, but my faith in the banksters being able to steamroll the population was never shaken. Not once. Not even for a microsecond.

About the cramdown issue, I don't have any real insight into whether it should be allowed on secured debt or not. (I incline towards FAB's view that it shouldn't be allowed on secured debt, though.) There are good arguments on both sides, but ideas about "deadweight losses" from foreclosure are red herrings - no different than the notion for instance that in deep downturns/depressions, there are deadweight losses because "highly specialized" labor and/or capital is laying fallow. Sometimes it takes time for labor and/or capital (and maybe even "houses" ;)) to realize that it is surplus.

I do think that the way this Senate vote is being spun is a charade, though. The administration is trying to paint this as a "failure" of the Obama efforts in this area. LOL. The banksters have totally captured the administration - in fact, I'd go so far as to say that no administration can be elected without the support of the banksters/Fed. It was never intended to pass. Just another example of the elites playing off the natural willingness of the serfs to believe that someone is looking out for their interests out of some supposed beneficence. No one is. Believe me.

Posted by: LMRiM at April 30, 2009 5:33 PM

diemos - i like that!

cram downs have problems, no doubt, but as has been written about ad nauseum, home loans get special treatment due to their 'social' importance (encouraging homeownership is desirable - that worked out really well didn't it?). the problem is, that special treatment creates all sorts of nasty externalities. other loans can be modified in BK, but not home loans. ask yourself, why?

Posted by: polip at April 30, 2009 5:43 PM

I wonder if this will come back to hurt the bankers (and bondholders) more than if the measure had passed. A judge ordering a change in terms is something a servicer can't do anything about. But if they voluntarily change terms, they can cause trouble with the bondholders (i.e. lawsuits). So the remaining option is foreclosure (assuming the bankrupt borrower can't afford the current payments), which seems to be getting a bad return (look at the number of REO flips and it's clear the banks are leaving money in the table when they take possession).

I actually enjoy these idiotic attempts to pretend unsustainable borrowing is the norm, since it will make the correction more drastic when it comes.

I'm still not sure if I think cram downs are morally correct. There's something fishy with letting the borrowers keep the collateral on a loan that's been modified by bankruptcy. Perhaps if the mortgage holder got most of the appreciation amount when the house is eventually sold, I'd feel better.

Posted by: amused_in_soma at April 30, 2009 5:58 PM

diemos - you're one of the clearest thinkers here. Your e-slave essay was brilliant too. Linking it here in case anyone missed it (it was buried deep in another thread)

Posted by: The Milkshake of Despair at April 30, 2009 6:03 PM

Hmm. In this country today a business property may be written down to the value of the collateral--we're talking SECURED debt here--in the event of a chapter 11 or corporate chapter 7 proceeding. The debt holders take the hit and everybody moves on. So someone (other than Ken Lewis) please explain exactly how all hell would break loose if this also applied to residential property.

Posted by: "Dave" at April 30, 2009 6:07 PM

@Legacy Dude, you said:

"These bankers who brought us into this crisis ...."

Whoa. No bank forced anyone to buy a house or take on a mortgage.

I'll agree that no bank put a gun to anyone's head, but they (the banksters) did flood the mortgage market with so much cheap money that a historic bubble was inevitable. If you wanted to "own" your residence, you had to play by their rules, and that meant buying at wildly inflated prices. As someone else (LMRIM?) pointed out, the game was rigged. The only way to avoid losing was not to play, and that *is* the fault of the bankers, who systematically bought off all regulation and failed in their attempt to offload the downside risk. But they did get their performance bonuses for at least 2002-2007.

Add societal (spouse, neighbors, colleagues, etc.) pressure to "own" instead of rent, and the masses got slaughtered, as surely as a herd of buffalo stampeded over a cliff.

(FWIW, I sold my property at the peak and have been happily renting ever since, but I'm single and enjoy a very mobile profession.)

Back on topic, cramdowns were part of the regulatory structure that was systematically dismantled. Paraphrasing Tanta (RIP), the distant threat of a cramdown dampens the eagerness of even the dimmest bonus-incented bank. Of course, for the cramdown disincentive to work the downside risk of the loan must stay with the originating party...

Posted by: Delancey at April 30, 2009 6:17 PM


the article i linked to above suggests precisely the cramdown-for-share-of-appreciation trade you suggest. the proposal is to automate the process (make it mechanical rather than discretionary), basing the write-down (and subsequent share-of-appreciation payment to the lender) on the homeowner's purchase price and subsequent overall market declines or gains. this avoids the disincentive to make efficient improvements that would otherwise obtain if they owner has to pay future appreciation (based on the market value of the property, rather than market level generally) back to the lender.

Posted by: cse at April 30, 2009 6:21 PM

@ Delancey: not saying the banks are blameless. This bubble, like all bubbles, was a mass hysteria with a swath of culpable players, banks among them.

@ "Dave": It's more complicated than you suggest. In a corporate BK, it's not uncommon for lenders to convert debt to equity and end up owning the borrower, in exchange for debt forgiven. Obviously indentured servitude isn't an option in a personal BK. On top of that, most corporations are much less levered than households if you look at it from a debt burden vs. cash flow generation perspective - makes restructuring easier.

@ cse: The same idea has been proposed by Hussman in the form of PAR, or Property Appreciation Rights. Good idea. Unfortunately, nearly impossible to implement and successfully administer in today's financial system, where instruments need to trade to create liquidity. To trade, they have to be valued properly. So each such loan would need to be valued as debt plus the embedded option of that one individual property appreciating back to par, etc. Basically impractical because of the sheer volume of mortgage loans out there. Push that on banks and they'll be forced to hold each loan until it matures, gets paid out through sale, or redefaults and is foreclosed anyway. In other words, severly diminished mortgage market liquidity.

Posted by: Legacy Dude at April 30, 2009 6:39 PM

Hmm. In this country today a business property may be written down to the value of the collateral--we're talking SECURED debt here--in the event of a chapter 11 or corporate chapter 7 proceeding. The debt holders take the hit and everybody moves on. So someone (other than Ken Lewis) please explain exactly how all hell would break loose if this also applied to residential property.

Could an LLC own a residential unit, run business in 60% of the space legit, and the owner still live in the other 40% to qualify for what you note above?

Posted by: gowiththeflow at April 30, 2009 8:49 PM

...Push that on banks and they'll be forced to hold each loan until it matures, gets paid out through sale, or redefaults and is foreclosed anyway. In other words, severly diminished mortgage market liquidity.

Tell me, what would be the consequences of this "severely diminished mortgage liquidity"? A return to lending practices of the 90s? A 20-80 basis point increase in typical mortgage rate? This does not sound very dangerous.

Posted by: Delancey at April 30, 2009 8:52 PM

I was just reading some emails from 2005 re: a prop I purchased and sold in 07' and the bank required a 50% LTV as the min. Made me laugh a bit. Rates being offered at the time were what they are now. Gov is clearly trying to create another bubble to help release some of the old air slowly with out anyone but the smart SS posters cathing on to what is really happening.

Posted by: gowiththeflow at April 30, 2009 9:01 PM

Could an LLC own a residential unit, run business in 60% of the space legit, and the owner still live in the other 40% to qualify for what you note above?

Sounds like you're asking for advice? I would talk to a BK lawyer...

Posted by: "Dave" at April 30, 2009 9:45 PM

It's more complicated than you suggest. In a corporate BK, it's not uncommon for lenders to convert debt to equity and end up owning the borrower, in exchange for debt forgiven.

Legacy: Most secured debt in a personal bankruptcy can be renegotiated via the judge; some property and many personal assets (including cars, boats and jewelry) can be deemed exempt from seizure... state laws differ.

I think what you're saying is that it's inconvenient and less profitable for the bank, which is absolutely true. But I'm unconvinced that it's justification for maintaining status quo.

Posted by: "Dave" at April 30, 2009 10:00 PM

No just curious based on what you posted. I may have mis-understood but thought you were saying that with business prop writing down to the value of the collateral was possible where as with residential it is not, or is difficult? Just looking to clarify/ verify I understood right?

Posted by: gowiththeflow at April 30, 2009 10:14 PM

Business bankruptcy cramdown: possible
Personal bankruptcy cramdown: impossible

Posted by: "Dave" at April 30, 2009 10:32 PM

Legacy Dude - Let's see when it comes to someone asking to borrow hundred of thousands of dollars without showing any evidence that they can afford to pay it back and an institution that decides it is wise to give that person hundreds of thousands of dollars without verifying that they can afford to pay it back, I'll say the blame lies with the institution.

Seriously if I go around throwing money at people whose fault will it be when I no longer have any capital, mine or the people that got in line for money when they heard I was giving it out?

Posted by: Rillion at April 30, 2009 10:50 PM

The debt holders take the hit and everybody moves on. So someone (other than Ken Lewis) please explain exactly how all hell would break loose if this also applied to residential property.

I will. I'm surprised others haven't picked up on this.

The charade that must be played is that the banks are solvent (they are not, at least the big ones are not that make up the majority of the US financial system). The banks have made a ton of accounting gimmicks and opacified their balance sheets to continue this charade, with Federal Govt approval. We now have zombified banks.

if homeowners are allowed to have cramdowns, then you will see a significant reduction in valuations in both loans held to maturity and also MBS securities.

the banks would then have to take immediate write downs, both on their loans and also their securities.

the banks simply don't have the capital. you can play accounting games all day (look at Wells Fargo as example) but at the end of the day you do need operating capital.

My guess is that the American Taxpayer hasn't quite grown enough wool to be shorn again, i.e. they will not support another several hundred billion dollar bank bailout

thus, can't let cramdowns happen. yet.

it's all about the bank balance sheets. I agree that Obama and Congress have been captured. what I don't know is whether or not it's complicit, or due to how severe the situation is. I'd guess it's both. (one bank goes down, they likely all go down).

I talked long ago about my thoughts of what "needed" to be done. and also how it would more than likely cause instant depression. it is clear nobody wants to take responsibility for crashing the financial system. I would guess that when one has access to the true banking books, that it is so horrific that it terrifies all those in power. and I think that this terror may be reasonable.

the feds have now seen the bank's books. they know how bad it is. we get the gussied up lipstick version, and even then it's abysmal.

Posted by: ex SF-er at May 1, 2009 4:40 AM

A positive take on this is that it doesn't really matter. The bubble that was is now like a brick in the air. How exactly the void left by all that conjured money ends up collapsing isn't particularly interesting because the results are going to be the same. The part about bubbles that really matters is the run up and how to prevent that or, failing that, take cover. Now all that is left will be calling the bottom, and that will be very easy because the market will stick there for a time.

Posted by: Mole Man at May 1, 2009 6:56 AM

I partially agree with your assessment, Ex, even though you did give me the "Ken Lewis answer"... :)

But compare these two scenarios where homeowner borrows $300K and buys a house; house is now worth $200K:

1. Homeowner walks away, takes appliances and copper pipes with him, kicks a few holes in the drywall on his way out. Bank sells dilapidated home at auction for $150K and writes down the loss, which include all the costs associated with the foreclosure process and resale of property.

2. Homeowner declares bankruptcy. (Remember, he must prove that he can't pay, so it's not an option for everybody who wants a cheaper monthly payment.) In court, judge reviews comps and all acknowledge that house is now worth $200K. If personal BK was like corporate BK, then creditor would have a claim on the collateral's current value of $200K (this would count as secured debt) AND a claim on the remaining $100K that he borrowed (this would be treated as unsecured debt--that's the big change that was being sought through legislation).

In scenario 2, Borrower must still pay the secured portion at some new rate/payment determined by the BK judge. Asset would get revalued at $200K. The unsecured portion would be treated just like credit card debt is today in BK. The claim is still there but that piece gets negotiated more aggressively (obviously, because it's an unsecured claim). So typically they will accept some number of pennies on the dollar for payment. (I believe 30-50 cents is typical for credit card debt.)

In this example, the balance sheet is less impaired than it would be from the nasty foreclosure process. But what it does do--and Ken Lewis knows this--is raise the cost of doing business. Makes it harder to securitize and pass the risk off to someone else. Makes the models predictive capabilities (hahaha) less predictive. And what the bankers can effectively do is convince Joe Sixpack that they will raise his rates by X% thanks to this new inconvenience from Joe's deadbeat neighbors (and those commie pinkos in the white house, of course).

Now project this scenario across the entire housing market. Think about the inland empire down south. If you had a bunch of people remaining in their homes and paying reduced rates, rather than 80% of the homes on a given block sitting vacant and dilapidated, under which scenario do you think the asset prices get impaired more? This is pure profit motivation and nothing less.

Still very curious about why the editor believes that congress got this one "right"...

Posted by: "Dave" at May 1, 2009 6:59 AM

Great explanation of how the BK process would work and the secured/unsecured distinction. For the reasons you note, I don't think this would have had a huge impact on the foreclosure issues. Anyone choosing the BK process might end up with a loan modification but would end up turning over substantially all assets now to creditors and suffering BK trustee oversight over all finances for some time.

And it is for that reason that I think ex SF-er is probably right regarding the big picture. This proposed process would not have helped that many homeowners and would not have directly cost the banking industry much, if anything. But any price discovery is not good for the banks now because it prevents the charade they are playing. The status quo (ignorance of true value) also keeps underwater homeowners paying on the hope that my place has held up better, which is preferable to having the banks/taxpayers eat it.

Posted by: Trip at May 1, 2009 7:25 AM

I agree fully with your scenario, except one thing. There is an option 3

Option 3:
Homeowner stops paying the mortgage (they may or may not walk away, may or may not stay in the home... may or may not destroy the property... doesn't matter).

Let's the pretend that the mortgage is part of a security (an MBS).

The bank does nothing. It simply pretends that the MBS is worth 100 cents on the dollar and takes no write downs through Level 3 Accounting.


the problem with the cramdown is that it creates price discovery. Price discovery can impair Level 1-2-3 valuations for securities, and it can impair hold-to-maturity valuations on loans in the bank's portfolio.

Posted by: ex SF-er at May 1, 2009 7:49 AM

I have yet to hear of any cases where homeowners stop paying and get to keep on living in the house indefinitely... And we must be clear what we're debating in terms of "price discovery". Are we talking about the value of the MBS or the value of the underlying collateral? A default by one homeowner in a pool of mortgages DOES impair the value of the MBS, no matter what form it takes (bankruptcy, jingle mail, etc.) Present value is based upon expected future cash flows. The value of MBS is also impacted by refinance or prepayment, btw. In any event, since banks can now use their own "sound judgement" (hahaha) rather than mark-to-market, I fail to see how this change would severely impact the balance sheet. I think it would affect future earnings, which is why the lobby leaned so convincingly on the Senators (and the editor of SS)...

Posted by: "Dave" at May 1, 2009 8:46 AM

"I have yet to hear of any cases where homeowners stop paying and get to keep on living in the house indefinitely"

My uncle's neighbor stopped paying and was able to keep living in his house for a year. That's not indefinitely, but pretty remarkable nonetheless. This was in an area that has far more foreclosures than SF (Sacto).

Posted by: location at May 1, 2009 9:15 AM

I have yet to hear of any cases where homeowners stop paying and get to keep on living in the house indefinitely
I saw another "produce the note" story on the local news. The angle on this one was: Coming soon to California.

Posted by: EBGuy at May 1, 2009 11:51 AM

I think this is just fine news. There are other debts that are just about impossible for bankrupcy judges to modify - for example student loans. No matter how bad your situation or how you got there, most individuals are still expected to repay student loan debt. If borrowers who borrowed for higher education can't have those loans crammed down, forgiven, or otherwise have the terms modified, why should homeowners stuck with a mortgage they can't afford (for whatever reason) get new terms?

Posted by: BeenThere at May 1, 2009 1:45 PM

"If housing prices more than double in a seven-year period without a commensurate increase in income, eventually something has to give"

No Kidding.

"In one city after another, prices of homes in the low-price tier appreciated the most and then fell the most; prices in the high-priced tier appreciated least and fell the least." (San Francisco is included)

Letting things return to their actual value is the best solution.


Posted by: anon94123 at May 3, 2009 5:08 PM

"prices in the high-priced tier appreciated least and fell the least"

It's not over, higher priced houses are now falling faster than any other category, and SF condos are falling faster than just about any other city.


Posted by: tipster at May 3, 2009 5:28 PM

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