ACTION: House Vote On Bankruptcy "Cram Down" Legislation Tomorrow

by: Chris Bowers

Wed Feb 25, 2009 at 16:30

One of the key policies needed to solve the housing crisis will be mortgage "cram down" legislation. "Cram down," which is probably poorly named, will allow bankruptcy judges to reduce mortgage payments to match current home values, rather than the inflated values of the housing bubble era (read more on "cram down" here). This legislation, introduced by Representative John Conyers (D-MI) in the House (HR 200), and Senator Dick Durbin (D-IL) in the Senate (S 61), will allow hundreds of thousands of people to stay in their homes at this critical juncture in our economy. It is supported by President Obama, andincluded as a principle in the administration's housing plan (see page 4).

Tomorrow, the House will vote on Representative Conyer's bankruptcy cram down. The whip count is unclear right now, but some Blue Dogs and New Democrats, including Melissa Bean (D-IL), Dennis Moore (D-KS), and New Democratic chair Ellen Tauscher (D-CA), are working on behalf of the financial services industry to water down the legislation. Tauscher in particular is problematic, both because of her leadership role in one of the ideological caucuses, and also because rumors are that she has organized up to two dozen members thus far. It is about time that Tauscher, and the Representatives she is organizing, stop listening to industry lobbyists who do not have the public interest in mind.

So, let's make Representative Tauscher listen to someone else right now. Contact Ellen Tauscher, and urge her to stop organizing other Democrats to water down HR 200. She needs to listen to honewoners, not to the financial industry that got us into this economic disaster:

Email form (California residents only)
D.C. office: 202.225.1880

Not only is helping struggling homeowners the right thing to do, but if we don't turn the corner on the mortgage and economic crisis, then Democrats will find themselves in the same bad electoral position Republicans currently face.

Tauscher is key to this vote, and she can be influenced. After she was threatened by a primary challenge during much of 2007, her voting habits distinctly changed for the better. As such, if you are feeling cheeky enough, it might not hurt to mention that when you call.

Contact Representative Ellen Tauscher on HR 200!
Email form (California residents only)
D.C. office: 202.225.1880

Chris Bowers :: ACTION: House Vote On Bankruptcy "Cram Down" Legislation Tomorrow

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Why is this connected to personal Bankruptcy at all? (0.00 / 0)
The Dept of Housing or FHA or other Govt agency/ regular Court should be in charge of this.

Why do people have to declare bankruptcy first?

And what if individual Bankruptcy Judges refuse to do this? What if they order a house sold to pay off debts???

Link makes no note of Tauscher or Bean (0.00 / 0)
Tell me you have another, because I just called, and then clicked.  There is no mention of Tauscher, Moore, or Bean in that article.  It just refers to the financial services industry and Republican opponents.

Tauscher is mentioned in CongressDaily (0.00 / 0)
"Senior Democratic sources said that a group of moderate lawmakers, including Rep. Ellen Tauscher, D-Calif., are exploring changes in the bill that would give bankruptcy judges greater power to reduce the principal on home loans."

And more info from Congress Daily on this:

"According to a House source, the New Democrats' changes include using FHA appraisal standards to determine a home's fair market value and tightening the eligibility standard for a debtor to enter bankruptcy. They would also require that the loan be unaffordable and not simply that the mortgage is more than the house's current value. The manager's amendment would reinstate some credit counseling requirements that borrowers must undergo before any bankruptcy plan is approved and increase the percentage of funds that banks could recover if the borrower later sells the house for a profit. The reimbursement rate would be based on a sliding scale."

[ Parent ]
Honest question... (0.00 / 0)
Say I owned a house a few years ago and sold it to someone at whatever the "inflated" market value of it was for $400,000.  The buyer secures a loan for the amount necessary, then pays me the $400k (which I use to pay off the rest of my mortgage, and then I get to keep the rest assuming my house increased in value).

Then, a few years later, the market value of that house takes a big hit and goes down to $300,000.  The lender the new owner went through has already paid off the $400,000 to the previous owner... But this "cramdown" would then force the lender to take a $100k hit because the property isn't worth as much any more?

Why should the lender be forced to take a $100k hit?  Or am I misunderstanding this?  I guess I'm wondering whether there should be some shared responsibility here... Maybe the lender should've realized there was a bubble or something and not given a loan based on that, but at the same time there's no guarantee that a house you buy is going to continue increasing in value forever and ever.  The people who make out here are the ones who sold their property before the bubble burst, and there's no way to recover the money there.  

I'm all for helping homeowners get into payment plans that they can afford and stopping the constant stream of foreclosures, but I guess I'm just kind of torn on this... If I decide to stop paying my loan and end up near foreclosure, would someone be willing to lop off a portion of my loan for free too?

Honestly, I'm just asking... I'm not sure I understand this correctly.

Bottom line (0.00 / 0)
You're in the $400k house that's only worth $300k now. You lose your job or something happens and you have to declare bankruptcy.

Today, the bankruptcy judge cannot change the mortgage on your primary residence. She can change your summer house mortgage and your boat loan, but not your primary residence.

That's just broken and bizarre. "Cram down" (horrible name) fixes it so that bankruptcy judges can adjust homeowner mortgages. Otherwise, your mortgage payment remains crazy high and perhaps you lose your house. You might have a chance to stay in it if the mortgage is reduced.

That's my understanding. Caveat: I haven't read the bills.

Karl in Drexel Hill, PA

[ Parent ]
homes are assets, and only a few states exempt primary residences in bankruptcy -- (0.00 / 0)
I think FL and TX do, but i know many states don't do so at all.

Even with this new thing -- which does not mandate that mortgages get modified for all who come before those Judges or Courts -- Bankruptcy Judges could still require that the bankrupt person sell the house --

homes are usually the largest and most valuable asset people have -- even when home values are in the gutter.

[ Parent ]
"homestead exemption" it's called -- (0.00 / 0)
2001 article in NYT --  Home Exemptions Snag Bankruptcy Bill --

...  In Florida, bankruptcy does not necessarily mean poverty, since state law allows debtors to shield their homes from creditors, even multimillion-dollar houses. ...

The provision in Florida law that allows Mr. Bilzerian and others to keep their extravagant homes, unlimited homestead exemption, also exists in Iowa, Kansas, South Dakota and Texas.   ...

By overwhelming margins last month, the House and Senate approved versions of a bill to rewrite bankruptcy laws, largely along the lines sought by credit card companies and banks. Both bills would curb the ability of many debtors entering bankruptcy to wipe out credit card debts and other unsecured loans.

But responding to notorious cases like Mr. Bilzerian's, the Senate inserted an amendment that would cap the amount of home equity that could be shielded from creditors at $125,000, which is higher than the exemption permitted by most states.  ....

[ Parent ]
"Mortgage Cramdown--Layering On Complexity" -- from Credit Slips blog -- (0.00 / 0)
(the whole blog is about credit and bankruptcy and stuff -- it's great overall)

...  Chapter 13 is already too complicated, and cramdown legislation will make it more so and lead to a new round of litigation and expense that will stand in the way of keeping people in their homes. By all means, Congress should enact mortgage cramdown, but it should take up bankruptcy simplification immediately after that if it really wants people to hold on to their homes in chapter 13.

Katie Porter has already noted the problem of high noncompletion rates in chapter 13 as a reason for suspecting that mortgage cramdown will not "save" many homes. See Cramdown Controversy #2--Will I "Succeed?" The problem is that the impact of the pending cramdown legislation could be small given the messy state of bankruptcy law since the 2005 changes.

The 2005 law has substantially increased the expense of bankruptcy, deterring and delaying its use among the worst off. The chapter 13 filing fee has gone up to $274.  "No look" attorneys' fees of at least $3,000 are the norm in chapter 13 (see at 25-26), and this is a bargain price considering what lawyers are expected to do under the new law.

Mortgage cramdown will add the difficulty of a valuation hearing, with experts engaging in a swearing contest about the value of a home for which, in many cases, there currently is no market. Cars have various "book" values that can be used to set default measures of value in bankruptcy, but there is no similar simple approach to valuing homes to save on litigation costs.

The bills add a lot of complexity of various sorts. S. 61 and H.R. 200 both would layer on a ridiculous, unnecessary third "good faith" test in chapter 13. The debtor already must file in good faith and propose a plan in good faith, yet the bill's drafters felt compelled to add an additional requirement that the modification be in good faith. This would stoke litigation over whether it is bad faith to pay the value of the home if the debtor could "afford" more ("afford" always being a malleable concept), with an open question about what other expenses should be taken into account when deciding what the debtor has available to pay for an underwater home.

It would be much better for Congress to explicitly state what it wants-for example, whether just paying the home's value is fine, with excess disposable income (if any) going to other secured debts (such as cars) and then unsecured debts.  Furthermore, it would be a good idea for Congress to state that if home and car payments use up all the available income over regular expenses, it is not "bad faith" to pay zero to unsecured creditors.  Congress should be heading off the inevitable arguments that just paying for collateral in chapter 13 is not good faith.  If chapter 13 is going to be a mechanism to save homes from foreclosure, many debtors will have nothing left to pay old unsecured debts.  Unfortunately, some judges and trustees have used a good faith test to push for rule-of-thumb amounts of unsecured debt repayment in chapter 13 whether or not that is feasible, contributing to a high noncompletion rate (historically, about two-thirds of chapter 13 cases).

I agree with Katie Porter that the provision in the bills for direct payments by debtors to claim holders is a mistake.  It is unclear whether this would always be required, or whether this language just gives courts discretion to allow direct payment.  In most cases, Chapter 13 trustees are needed to make sure that payments actually get credited appropriately to debtors' accounts.  If the problem is feasibility of plans due to paying trustee fees on mortgage amounts, Congress could provide for a lower trustee fee on those payments. Without the trustees involved in record-keeping, debtors will face huge cost and difficulty at case closing to try to show that they really are current on their mortgages.  Most trustees now make it a default practice that mortgage payments be made through them, and this has saved on trouble for debtors, trustees and judges.    

Another aspect of the bills that is troublesome is that the debtor must have already received a notice of foreclosure in order to cramdown.  This prevents debtors from taking charge of a hopeless situation and getting it resolved; they would have to wait for the lender to send a foreclosure notice before they could make use of chapter 13 to modify their mortgages. ...


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