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January 28, 2009

Comments

A whole lot of debt is going to have to be written down in the next few years.

Yup. And much of that debt is primary-residence mortgages. But how much? Keeping in mind that every trillion dollars of write-downs amounts to about $10,000 per household in the US, that several trillions seem to be at issue, and that surely(?) less than half of US households are likely to seek cram-downs, are we talking about something like $100K per distressed household? I ask in all seriousness; I don't know the real statistics.

On a different tack, and hoping I don't come across as a devil's advocate, I am reminded of George Bailey's immortal line about how "... your money's not here, it's in Sam's house, and in Joe's house ..." and wonder what a wise and upright judge would say to the lawyer for Bailey Building and Loan, creditor, in Sam or Joe's bankruptcy proceedings.

It would be easy for the judge to cram down a mortgage held by Old Man Potter, of course ...

--TP

A whole lot of debt is going to have to be written down in the next few years. This is a way of writing down some of it in a way that's basically fair, that shares the pain between the borrower, who has to go through bankruptcy, have his or her credit destroyed, etc., and the lender/servicer/whoever, who has to eat some of the value of the loan. It avoids the horrendous disruption of foreclosure, and it does so without either letting borrowers off the hook or paying lenders the full price of the mortgage, as though they had nothing whatsoever to do with the ludicrous loans that got made.

I've got to say, unless there's actual fraud involved, as opposed to just aggressive marketing, I don't at all see why anyone but the borrower should take the hit. I'm not at all sympathetic with people who took out loans they really couldn't afford. You can't fool an honest person.

So where do I apply to get my CC balance crammed down? How about my auto loan? I mean I thought I could afford that home entertainment center and the sports package on my car when I bought it. And the creditors made it so easy…

I don’t have kids, but I feel sorry for those who do right now. We’re in the process of sticking your children and grandchildren with a gargantuan debt. We’re shifting the mess we made to future generations to pay off. Where does it stop?

So where do I apply to get my CC balance crammed down?

consult your Yellow Pages for a local bankruptcy attorney.

The problem being is that some of us our paying for other people's frak-ups. I live in Northern Virginia. One of those places that are supposed to have minimal losses.

Bought at 140, figured it would go up and then come down to about the same. Yup, it did shoot to 280 or so, but now it's down to 70-100K (with some houses going for 50K) not because I or my soon to be ex-wife did anything wrong, but because everyone around us is foreclosing, and thus driving down prices.

So by any standard comparative market analysis we're "underwater" 23K-60K. Normally, I'd just say, "ah well, we'll just wait it out."

But note that phrase, "soon to be ex-wife." I can afford the house barely alone. But we can't afford to sell the place, and I'd rather move and be closer to family (not that far). Looking at renting it out perhaps, because while prices have collapsed, the rental market hasn't.

I don't at all see why anyone but the borrower should take the hit. I'm not at all sympathetic with people who took out loans they really couldn't afford. You can't fool an honest person.

That works the other way, too:

I don't at all see why anyone but the lender should take the hit. I'm not at all sympathetic with people who handed out loans they really couldn't expect to collect. You can't fool an honest person.

Remember that the lenders were overriding their own underwriting standards and ignoring their chief risk officers because they knew they could securitize the loans and sell them to some other sucker.

Its ok, childless people don't need to spare a thought for our kids and grandkids because I can assure you that after the Bush administration mortgaged their future to bail out the banks and to prosecute the Iraqi war, when they gave our national honor and pride away, they weren't consulted either. Oh, and I personally think that my children and grandchildren would rather pay higher taxes in the future than lose their homes, their family health care, and perhaps their educations and lives in the present. That is the choice we are facing thanks to the lousy policies of the last eight years.


As for "people who did the right thing" while everyone else around them wrongfully allowed their lives to fall apart, or to have their houses foreclosed...uh? isn't that essentially the same as the "my abortion was moral but you had yours because you are a slut" argument? Everyone's in trouble because everyone's in trouble. IF there were a "evil mortgage holder Zero" he or she is long gone and the hurt is spreading pretty rapidly through equally innocent people. The smart policy decision to make is to force the cram downs in order to stabilize neighborhoods and encourage people to keep paying something on their houses rather than forcing them out altogether. Its not a reward, if that makes the "good" people uncomfortable. Its just sensible capitalist policy forcing or encouraging people to remain in debt slavery to home ownership.

aimai

consult your Yellow Pages for a local bankruptcy attorney.

I don’t need to file bankruptcy, any more than the thousands of people who will take advantage of this. If someone is handing out free money (or offering to bail you out of your financial mistakes) it’s kind of silly not to get in line.

I don’t need to file bankruptcy, any more than the thousands of people who will take advantage of this.

are we talking about the same thing?

"A measure to allow judges to reduce the principal amounts of mortgages for troubled borrowers in bankruptcy cleared a key hurdle Tuesday...

Precisely cleek, I'm SOL because I'm not going to go bankrupt or get foreclosed on. I'm just going to be stuck in my current home until I get enough equity I can break even, or I can figure out a way to rent it out for minimal effort on my part. Too rich for the cram down, too poor to take the loss.

You have to be in financial distress for anything to happen. Hell, if I wasn't cleared, I'd look at just getting my ex-wife off the mortgage and take the foreclosure hit on my credit score. Move everything but the minimum into storage and live rent-free until they finally get around to kicking me out. Not the most moral thing to do, which is the other reason why I haven't, but damn if it doesn't set me better up for the future then the current plan does.

Good news indeed! I do wonder about this, though: "Citigroup Inc. had demanded the changes in exchange for throwing its weight behind the bill ..."

How many votes does Citigroup have in congress? I thought it was, like, based on geographical areas or something like that. I must have missed the civics lesson about direct election of corporations.

Current law allows cram downs for mortgages on vacation properties, but not for those on primary residences

There's probably a good reason for this. Can anyone tell me what it is? As it is, this is my daily WTF.

I think the lenders should bear most of the cost of the cram down as they are supposed to be experts, unlike the borrowers.

Having said that, is there any way of having a cramdown/musical chairs solution? The borough could maintain a list of bankrupt/foreclosure risk houses, perform the cramdown, then move each family into a smaller bankrupt foreclosure risk house whose payments they can hopefully afford.

This effectively penalises people for biting off more than they can chew while keeping them off the streets.

Slartibartfast: laws are written by rich people. Next question!

If so...why wouldn't rich people want the mortgage on their primary residence cram-able?

How many votes does Citigroup have in congress?

Yglesias was noticing the same thing a couple of weeks ago.

Because well, if you gave everyone cram downs it would get to costly. So "we" will give cram downs to the types of residences that primarily only "our kind" a benefit; while leaving the vast majority out in the cold. It wouldn't do to have proles, of which there are many, to have all the benefits of their betters, eh old chap?

(Note written mostly tongue in cheek)

Because well, if you gave everyone cram downs it would get to costly.

Plausible. But someone is going to pay, regardless. Maybe they're just now coming around to that realization.

As it is, this is my daily WTF.

Same here.

...but now it's down to 70-100K (with some houses going for 50K) not because I or my soon to be ex-wife did anything wrong, but because everyone around us is foreclosing, and thus driving down prices.

This is what to me says, when you look at the alternatives, we're not talking about some zero-sum game between lenders and borrowers. With lots and lots of forclosures, everyone eats a giant turd sandwich. It's not like it helps the lenders any, so, AFAICT, fighting the cram downs is, in the big picture, self-flagellation on the part of lenders. Is it some kind of victory to foreclose on a bunch of houses that will be worth far less than they would be if the mortgages we crammed down?

Is it some kind of victory to foreclose on a bunch of houses that will be worth far less than they would be if the mortgages we crammed down?

Exactly what I was thinking. The bank is more likely to recover its principle from a crammed-down mortgage, I'd think, if it could avoid the whole sherriff's auction part of the deal.

The part about sharing any gains with the lender on sale of a crammed-down mortgage also looks good to me.

How many votes does Citigroup have in congress?

I'm tempted to say that the answer here is, "A lot! They buy them!"

Or actually, it's the Mortgage Bankers' Association that buys them. After reading this post, I put up a thing about them at Ezra's where I'm guestblogging.

As stated in the context of the post, this sounds like a workable solution - that is, if the borrow goes through a formal debt restructuring within the bankruptcy process. Maybe GM and Chrysler should go this route.

If GM or Chrysler have a primary residence whose mortgage could be crammed down to good effect, well, yes.

Before everybody gets on a high horse about moral hazard issues, please just go read that post by Tanta that hilzoy linked to, and the other bits of commentary on the subject of mortgage cramdowns and bankruptcy over at calculatedrisk.

Or if you want, I'll give you the short version:

1 - Bankruptcy is no fun. If you think that is the royal road to riches and a pleasant life by getting everybody else to subsidize your house, then by all means try it out and come back a few years later to tell us how great it worked out for you.

2 - This is pretty close to the optimum path for recovery as much of the loan as is humanly possible. The lender will be worse off, not better, if other paths are taken. This is because the value of the home will be crammed-down anyway if it goes to foreclosure and is turned into an REO sale, and foreclosures impose additional costs which eat into the money recovered.

Cramdowns are as close to a win-win as you are ever going to get, because they benefit both the borrower and the lender, and society as a whole (via preventing physical deterioration of our housing stock and mitigating the social and economic dislocation when people are thrown out of their homes).

Cram downs and modifications are good for the borrowers, and their neighbors, not for the banks.

Our previous home was lost to foreclosure, and has gone from being the 5th priciest home in a 4 block area to being priced under all but about 5% of the homes.

The neighbors will sure be happy that their $300-$350K homes are smaller and with fewer updates than the house that the bank will sell for about $225K. So will the local county, even though they have frozen assessments and taxes at current rates for the next few years as prices free fall.

Hmm,

OT, but the new posting system allows me to post while at work; the prior method would be blocked as a social network.

Citigroup Inc. had demanded the changes in exchange for throwing its weight behind the bill

So taking billions if federal dough now gives you a vote in congress?

Cram downs and modifications are good for the borrowers, and their neighbors, not for the banks.

Did you intend to support that last part? Because I don't think you did.

"Too rich for the cram down, too poor to take the loss."

I think DecidedFenceSitter's dilemma is why the pain of this Great Recession is so widespread, and why there are no easy answers to get us out of it.

The subject headers of the last couple of posts are starting to sound awfully like those of certain spams I constantly get.

The subject headers of the last couple of posts are starting to sound awfully like those of certain spams I constantly get.

"I'm SOL because I'm not going to go bankrupt or get foreclosed on."

I'd suggest reexamining this thought for possible problems.

Rephrase: I'm SOL for getting out of this neighborhood.

No, I'm not in a bad place. But you know what, I'm really not looking forward to being in a house I used to share with my ex-wife. Where we used to cuddle. Where we used to talk. Where we used... you get the idea. Instead, it gets to be a yoke around my neck. If I could get someone to take over the mortgage and walk away (and heck the mortgage is less then the rents in the neighborhood) I would. Just to be done with this place.

Oh and the paperwork finally arrived today. So I apologize if this is snippy, but I think I got all those bits out.


Just a quick comment that bankruptcy laws are good for society in general.

One always hears comments like - "I was responsible and always did the right thing with money; I've never been bankrupt - what is society doing for ME?"

There was an age when people who couldn't pay their debts were thrown in prison. We could go back to this, and it would warm the heart of anyone who was in fact responsible with their money and paid their debts - to see those deadbeats rotting behind bars.

What's the use of virtue if you can't behold others suffering through lack of virtue, anyways?

However, it turns out that bankruptcy is actually one of those things that makes modern industrialized society possible. It allows people to take risks with their money (or with other peoples money), fail, and try again.

Somehow, the individual being permitted to fail, in an organized manner, in bankruptcy, is actually a benefit to society.

I venture to suggest that, closely examined, the question of mortgage cramdowns might turn out, on further analysis, to be rather like that.

Might it actually be less disruptive and an overall benefit to you and your neighbors to have your neighbor's home loan "adjusted" rather than the house standing empty, rotting and attracting vermin?

Maybe.

There was an age when people who couldn't pay their debts were thrown in prison.

We still have that except it's reserved only for those who can't make their alimony payments.

Sometimes debt consolidation is not the best solution for your needs, but debt settlement is. Your debt consolidation counselor can also help you with this solution to clearing your debt. The comments pork-shoulder-and-ham company .

Slarti,

Sorry, from my experience, that is the way banks are treating it. (And yes, anecdote does not equal data.)

For all three of my mortgages (while going through the inability to sell the old house for two years, job loss, and failed adoption), the banks would not consider any modification to the loans involved. Their reasoning: I had made my payments on time in the past, so there was no need to adjust the mortgages or the payments. I understand the need to avoid fraudulent claims by borrowers, but all of the financial information was laid out to them, and the response was "no", and the reason stated as above.

After foreclosure started, the equity loan on the old house was then willing to reduce payments by half, but only for a specified period of time.

The current loan is a running 30 days delinquent, but will only consider modifications that will increase payments. If I go 60 days+ delinquent, in addition to being required to pay all delinquency in full, they will then consider further modification, but will not detail these, nor will they guarantee modification, or that they will not start foreclosure proceedings. Having lost one house to foreclosure, I will not gamble on the good will of any bank to preserve my house (and likely marriage after the trauma on the last one).

I agree with the Tanta post that it should be in banks' (and by extension, the MBS investors--in this case Fannie) to accept a slightly lower future payout in return for being able to recalculate the mortgage as secure, and not having to take the recurring costs of upkeep, taxes, and RE fees on the house, but from dealing with them on several levels, they feel it is the equivalent of pulling fingernails.

I agree, I was sloppy on my conclusion re bank losses, but every time I hear about the "banks will help" and "the HELP NOW program will assist homeowners", I think of my on the ground experience and say they won't. Banks will only help if they are forced to, even if it is in their own long term best interest. If a BK judge could cram down or modify a mortgage, I would take that painful route, but I can't right now, because without BK modification of a mortgage, there is no solution for my wife and I short of taking a loss on our current home (in addition to the $130K + on our old one) and hoping for a family member to let us move in (losing half or more of our pets, which will destroy us at this point) or finding rental (and losing all or most of our pets).

I should stop commenting on topics like this. The situations hit too close to home, and the platitudes of the bank apologists raise my blood pressure to nuclear containment levels. However, if one person can read what happened to us, and be able to move forward with a fix that would help out others in similar situations, it would be worth it.

Debt Free has a point.

failed adoption

Devastating. I've been in that process a couple of times, and the first time was...stressful. I hate to use a cliche here, but I feel your pain.

But I'm on the other side now, with two kids, so the pain is only a memory.

Sorry as well for your financial troubles. Bankruptcy isn't an easy out, nor is foreclosure. I've also been through the latter, and it's no fun. Part of the no-fun-ness was that it took the bank several months longer than me to finally realize that I couldn't keep the house. Cramdown would have helped a little in that case, but not much. I was already out of my house, and was trying to rent it to keep the payments going, and the rental market also tanked.

None of this helps you, but I can't help but try.

Are you going to clobber that comment, Eric, or just screw with the address? If you don't want to do that, I'd be happy to.

I loathe comments [email protected]

"Debt Free has a point."

Debt free is a generic spammer. Always check addresses under names, and then notice whether a comment is actually so generic that it would fit in any blog thread on any blog remotely addressing the topic of the spam.

Obviously, Gary.

I changed some things about the comment that negate its pork-shoulder-and-ham value.

Hmmm, I'm pro-bankruptcy (in the sense of thinking that having it available is good for society) and have mixed feelings about the specific contours of the cram-down bill so far as I understand it.

My understanding is that the cram-down bill isn't just for bankruptcies. Is that wrong? Am I confused?

If it is just for bankruptcies I'm more comfortable with it. If it isn't, I have reservations.

TTL has a sound point that the cramdowns might actually help some lenders as well.

As I understand it, once a mortgage has been securitized it becomes very difficult to renegotiate the terms, even when doing so would obviously be in the best interest of a lender who held the entire mortgage.

If a house with a market value of $250K has a $350K mortgage on it it's better all around to renegotiate than to foreclose. Knock the loan amount down to $250K and if the borrower can pay that you've sold the home at the market price, in effect, without going through the very expensive and time-consuming foreclosure procedure.

By the way, I don't really see how third parties are damaged by this. It's not as if the cramdown somehow makes the house worth less and has some indirect effect on other people. In fact, to the extent the owner is able to meet new payments and stay in the house the cramdown will help the neighborhood, by reducing the number of empty foreclosed properties on the street.

Afaik, the cram-down power exists only in bankruptcy. I'm pretty comfortable with that conclusion because otherwise the lender would have a pretty good 5th Amendment takings case. The only reason that cram-down is constitutional is that the regulation of bankruptcy is a constitutional power. (Art I, sec. 8, clause 5.)

You can't fool an honest person.

Of course you can. Honest people are precisely those who don't go looking for the loopholes, who believe the smiling lender who says "Oh, nobody really enforces that provision anyway," or who thinks their mortgage lender certainly wouldn't tell them anything was true unless it was written down somewhere.

Your statement above is nothing more than defensive attribution; if I'm honest and sensible, I will never be cheated, and I know this because I assume anyone who is in trouble is there 100% due to their own behavior.

Honesty, in any case, has little to do with whether mortgage debt should be treated like all other secured debt.

@Sebastian:

The legislation under consideration is for people in bankruptcy. From the excerpt in hilzoy's post (my emphasis):

A measure to allow judges to reduce the principal amounts of mortgages for troubled borrowers in bankruptcy cleared a key hurdle Tuesday ... Under the legislation, borrowers would be eligible to have a bankruptcy judge reduce the principal balance on their home loan -- a move known as a "cram down."

Dick Durbin wanted to make this part of the bailout in October, but was prevented from doing so (by Dem leadership in a hurry and by the prospect of still more Republican opposition).

I know what the article said, but I was wondering because I've seen other discussions that weren't tied to bankruptcy. Is there a Senate Bill that is different or something?

But on second review, I'm heartened by "In another change, the legislation will now require recipients of cram downs who resell their home within five years to share the proceeds with their lender."

This makes fraudulent circumstances less likely.

I think the lenders should bear most of the cost of the cram down as they are supposed to be experts, unlike the borrowers.

There have a been a few posts to this effect, that the lenders and the borrowers sorta "got into this mess together" and should both pay etc. Only, that's not really true. The lenders lived up to their end of the bargain, they gave the borrowers a big wad of cash as promised. In return, the borrower committed with their signature to pay the money back, or pay dire consequences. Maybe the lender "should have known" that the borrower couldn't realistically pay it back -- but that's beside the point. Ultimately, however, the lender doesn't have to know or care about that, because it's the borrower who has put his future, and his family's future, on the line, and if you accept a big bag of money from someone the only calculation that counts is your own.

All these people knew the money was too good to be true, but they took it, and now we're supposed to feel sorry for them - that's what's dishonest. Now all our mortgages will be more expensive, and our house prices depressed further. Moreover, the same people lauding this changing of the rules of the deal after the fact are frequently the same people complaining that the banks are not currently loaning enough. You can't have it both ways.

"All these people knew the money was too good to be true" Evidence for this please.

"Dick Durbin wanted to make this part of the bailout in October, but was prevented from doing so (by Dem leadership in a hurry and by the prospect of still more Republican opposition)."

I wonder if I am the only person whose blood ran cold at Nell's mention of the October bailout -- $350 billion down the drain.

How does that happen?

For starters, I'd submit it as an object lesson in failed leadership on the part of the Democratic Congress and the Bush Administration.

Bush Secretary of the Treasury Henry Paulson initially wanted to create a "bad bank" in order to separate good debt from bad -- which is said to be what is now being discussed by the Obama Administration. Of course, Paulson was talked out of this by Wall Street -- Wall Street!

Sebastian:

Just wondering: Do you think it is fraudulent of Citibank to accept billions in taxpayer money and then shop for a $50 million private jet?

Not a single Republican in the House voted for the stimulus package.

Now look, I have big doubts about the stimulus package, not ideological but because I think we are so royally f----- at this point that we might as well eat each now rather than later when we have less flesh on our bones.

Or should we wait for Borg-Warner to hire all of the excess labor because auto parts is where I would put my money now, son.

But, not a single vote from the opposition for this is like not a single vote to back Roosevelt's decision to go to war after Pearl Harbor --- maybe because the Republican Party has a thing about not disturbing the sushi base of their Party.

I think we call their bluffs and abandon the stimulus --- and retroactively abandon TARP. Let all the banks fail except maybe a credit union in Dubuque and the Maryknoll Mothers money market alliteration fund --- then we tie raw meat around the necks of the unAmerican scum Republican House members and their families and we let the starving dogs out --

--- and we see what happens -- and we film it and make it an HBO special and pay off the effing deficit with the proceeds.

The Republican Party armed the citizenry and now they want to starve the armed citizenry.

The Bell Curve curves for thee.

As I understand it (and my understanding owes a lot to Tanta at Calculated Risk ...), allowing cram downs just amounts to treating mortgage like any other form of secured debt in bankruptcy: if the amount you owe is greater than the value of the asset that secures the debt, your debt can be modified by a bankruptcy judge. So, in the case at hand, if your mortgage is underwater, it can be written down to the amount your house is now worth, and the remainder of your debt to the mortgage company is treated like other unsecured debt.

Every other form of secured debt is treated this way in bankruptcy.

Not that this bears on the merits of mortgage cram-downs, but every other form of secured debt does not qualify for tax exemptions nor is protected under bankruptcy to the same extent by state law (e.g. FL). (I grant that the former is only related tangentially to BK or default.) Foreclosure is quite a bit more profound in effect than even the repo-man coming for the car. I think it is disingenuous to argue that mortgage loans are just like any other loans, even narrowly.

@byrningman
There's also the aspect that the lenders as an industry were seeking out borrowers who didn't fully understand the terms and pushing them into unsuitable contracts. Probably because lenders could make money without carrying the risk. Icelanders were carrying the risk.

Any thoughts on the rest of my post? It probably supports your point of view better.

Just a quick update to bring this thread up to date. Remember the discussions above about how lenders can actually save money by keeping people in their homes rather than foreclosing? Here's some direct evidence of how that works in practice:

CalcRisk: Lenders swamped by too many foreclosures are dumping foreclosed homes at below market rates.

The house flippers are back in business - buy a property from the bank, and then turn around and sell it for more money, without doing anything at all to the property. Nobody could have predicted that not allowing loans to be crammed down could have led to dumping of excess properties at below market rates - hoocoodanode?

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