Cramdown Shows How Congress (Still) Really Works

by: David Sirota

Mon Mar 02, 2009 at 14:19

For those who need a 10,000 foot overview of the debate over the cramdown legislation, I highly suggest this recent Businessweek cover story. Not only does it explain the issue and how banks are effectively exacerbating the foreclosure crisis, it shows the ugly side of how Congress still works. By that I mean it shows that in debates over issues of money and corporate power, banks are treated as the most important players of all - more important than the public at large.
David Sirota :: Cramdown Shows How Congress (Still) Really Works
For a taste, here's what I mean:

Senator Dick Durbin (D-Ill.), who since 2007 had led unsuccessful efforts in Congress to give bankruptcy judges authority to modify home loans, dispatched his senior economic policy adviser, Brad J. McConnell, to talk with lobbyists for JPMorgan Chase and Bank of America. "Each agreed to take [the idea] back to their folks to see what they could do," says a person familiar with the talks...

By the time McConnell talked to the JPMorgan and BofA representatives the next day, however, "they had gone on full defense mode and started to complain about how lousy a deal Citi had struck," says the person familiar with the exchanges. Bank opposition...

In the following weeks, banking lobbyists launched a renewed attack on the cramdown legislation, enlisting as an ally Republican Representative Lamar Smith of Texas, among others. Apart from Citi, "the industry remains united in that bankruptcy cramdown would destabilize the market" by creating widespread uncertainty about the value of numerous troubled mortgages, says Steve O'Connor, senior vice-president for government relations at the Mortgage Bankers Assn. His group is distributing talking points to key congressional aides laying out reasons why "Congress should defeat bankruptcy reform legislation."...

Industry lobbyists are organizing home state bankers to pressure moderate Democrats they hope will be receptive to limiting the kinds of loans eligible for cramdown. One target: Senator Evan Bayh of Indiana.

There's a lot in this passage - but I think the most important part is how lawmakers are still integrally involving corporate lobbyists in their legislative efforts to deal with the economic crisis. I don't mean to pick on Durbin - on this issue (and on many) he's been great. I mean to highlight the enduring corruption of the process itself.

It's stunning, really - these lobbyists represent the same corporations that ran the economy into the ground, and yet Congress still feels the need to ask their permission to go ahead with legislation to stop their most egregious practices.

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Thanks for that link (0.00 / 0)
I hadn't seen the Business Week article yet.

Robin Hayes lied, Robin Hayes cried and  thousands of folks lost their jobs.

It's outrageous! (0.00 / 0)
Let the Uprising begin!

Our congresscritters certainly are begging for it.

again - why? (0.00 / 0)
Why are we rewarding people who took risky mortgages on bubbled properties that they couldn't afford?

I realize on OpenLeft the banks are always evil and the homeowners are always good, but come on -- these people took loans.  Taking a loan assumes some risk on your part.  The bank shouldn't be forced to simply reduce the value of a loan and eat that loss.  

Why not extend the loan instead?  That could result in the same monthly payment as a cramdown, so homeowners would be able to stay in their houses and not have their credit wrecked by a foreclosure, but they'd still be liable for the full amount.  Having banks eat huge losses up-front isn't a good way to put them back on the road to repaying the government, either.

From that Businessweek article, about a woman and man who bought a $600K house on two meager salaries, nothing down, with two subprime loans: "We knew when we bought that the payments would be a stretch," says Stefanie. She regrets assuming they would be able to refinance at a lower rate. "We are not deadbeats," she adds. "All we want is a mortgage we can afford."

Well, maybe you should have signed up for a mortgage you could have afforded.  No one forced them to take that loan.  No one forced them to buy a house they couldn't afford.  No one forced them to take a double-subprime loan that they'd be required to refinance in a year.  

So why exactly would we effectively write them a check for tens or hundreds of thousands of dollars?  Why do they get to live in that house, while I'm living in a house worth half that (when I'm sure my income was twice theirs)?

It'd be nice to see just a LITTLE outrage at those folks around here.

You wouldn't be writing any checks to these people. (0.00 / 0)
There is no government bailout to deadbeats in the cramdown proposal.  See my post below.

[ Parent ]
so (0.00 / 0)
Cramdowns only happen as part of the debtor declaring bankruptcy?  How many people are going to be willing to do that, vs just walking away from the home that they're underwater on?

Also, I see nothing in your posts that indicate that it won't help deadbeats.

[ Parent ]
why are we rewarding bank stockholders (0.00 / 0)
who invested in banks that made risky loans that had little chance of being paid out?

As soon as we nationalize the banks and clean out the stockholders and executives, THEN we can start moralizing about how cramdown is unfair to the mortgageholders.

Not to mention that the rate of foreclosures needs to slow down if the housing market is going to stabilize.

And this coming from someone who has been renting since 1998, believing that the housing market was stupid and was going to implode.

[ Parent ]
why that order? (0.00 / 0)
Why does it have to banks first, then mortageholders?  Why not both?  There's more than enough blame to go around.

I'm just looking for a little balance on this site.

[ Parent ]
balance is what I"m looking for (4.00 / 1)
And we've already given massive bailouts to the banks that have made horrible investments.

We're asking for something of a much smaller magnitude for homeowners.  And it's something that is already afforded to those who can afford second houses.

[ Parent ]
I get what you are saying but (0.00 / 0)
people in general tend to think that bank loan officers and other mortgage professionals know more about mortgages than they do.  So when a person in a bank office wearing a suit tells you that this loan is a good deal, that you can afford it, that it will be your key to your future and to the future of your kids, you have a tendency to believe them.  After all, they are the professionals and they are telling you its a good deal.

My mom is pretty conservative, has voted R all her life, but she places the blame squarely on the banks because used to work for our home-town bank, and remembers the day when it was the responsibility of the bank not to make loans that people couldn't afford.  It was part of their professional responsibility.  And I use that term because I am a civil engineer and I, too, have a professional responsibility that I take very seriously not to do things that endanger the public.  There was a time when loan officers had that same level of professional responsibility and ethics.  It is like if I were designing a bridge, and I knew we would make more money on it if we didn't put any center supports in, and so I went to the community leaders and told them the bridge would be just fine with no center supports, and got them to sign off on it, and then when it collapsed told them it was their fault because they gave the okay.

Should the homeowners bear some of the consequences of their actions?  Sure -- but aren't they, just by all the shit they are dealing with, and the fact that even with a cramdown mortgage they will still be paying for a very, very long time, and may not ever recoup their full investment?

[ Parent ]
hm (0.00 / 0)
People trusting banks to tell them what they can afford is no different than people trusting car salesmen to tell them what they should pay for a car.

The difference between this and your professional responsibility as an engineer is that we trust you to do things that we don't have the knowledge or expertise to do.  We HAVE to trust you because I sure can't tell if a bridge is structurally safe or not.

But loans are simple.  We handle monthly payments from the moment we're independent.  It's OUR responsibility to make a budget that we can handle.  Yes, some things like ARMs can be confusing, but when you're taking a risk, you need to do your homework.  And if you're not able to understand what you're signing up for, go with something utterly simple like a fixed-term loan.  I've always stuck with 30- or 20-year fixed mortgages because I know exactly how they work, and exactly what I'm responsible for.  My payment won't go up, I won't need to refinance, I stay in my house so long as I can pay my bill, and I know exactly when I'll have the house paid off.

What in the world are people doing signing up for loans that they didn't understand?

[ Parent ]
Cramdown Lies (4.00 / 3)
The two big lies the talking heads for the Banking Industry keep spreading:

1) "It abrogates contracts"  uh, duh!!  That is exactly what bankruptcy court is all about: abrogating contracts.  If it wasn't, we wouldn't call it bankruptcy.

2) "It would be devastating to the mortgage lending market (because it is such a radical remedy).  In a Chapter 13 bankruptcy proceeding ALL SECURED DEBT (except the mortgage on the debtor's primary residence) is subject to a cramdown.  That means any auto loans, boat loans, second houses in ski towns, whatever, the debt is restructured so that the then fair market value of the security becomes the new secured debt (the rest of the debt becomes unsecured).  Bankruptcy law does this because all the secured creditor would be entitled to is repossession of the now diminished asset.  And they shouldn't get any preference over any other "unsecured" creditor (e.g. credit cards) over the unsecured portion of the debt.  

It is common (legal) sense to do this.  

Only primary residence mortgages are exempt from this rule and that is only what Congress is attempting to change, AND ONLY, for mortgages that have already been issued prior to the effective date , AND ONLY if the debtor has contacted the bank in advance of the bankruptcy filing.

Even this simple and equitable change in the law is too much for these money grubbing jerks to acquiescece.

How did we get there? (0.00 / 0)
Why is it that, currently, everything except the primary residence can be crammed down? How is it that a vacation home, or a boat is protected by bankruptcy but a primary home is not?

Conduct your own interview of Sarah Palin!

[ Parent ]
That's why.  That hellish mantra uttered by the right.

[ Parent ]
It's been that way since I first started practicing law 30 years ago. (4.00 / 1)
The real reason is probably this:  Home prices have not suffered significant declines in valuation nationally since the Great Depression.  Virtually all other secured indebtedness covers property that (other than second homes) generally depreciates each year of ownership.  In a Chapter 13, the lender doesn't want the collateral back unless it's the primary residence because they could again almost every time realize a profit via foreclosure.

I think at this point, their models still show them making more without the cramdown, even though their models have been nothing but wrong for many years. The real fear is that the law becomes permanent and includes future mortgages.  They just don't trust bankruptcy judges and trustees to have their best interests at heart.  

[ Parent ]
The key nut (0.00 / 0)
..."the industry remains united in that bankruptcy cramdown would destabilize the market" by creating widespread uncertainty about the value of numerous troubled mortgages...

This is the problem. Somehow, things have gotten so twisted around that a cramdown (where a borrower will be able to pay back a portion of what is currently owed) create more uncertainty than foreclosure. Banks used to have an incentive to avoid foreclosure. But now (from my understanding) they're backed up with credit default swaps they got from AIG or whoever, and when the mortgage goes belly up, they're the ones on the hook, and since they're too big to fail, taxpayers bail them out. Privatized profits, socialized risk.

If the banks had to actually bear the burden of the risky loans they made instead of being able to bury it in the back yard under the dark of night, maybe they wouldn't have gotten us into this situation in the first place.

Cramdowns are a good remedy. They force banks to pay for some of the risk they took, so you reduce the size of that particular moral hazard.

Also, how did we get to the current situation where bankruptcy judges can renegotiate terms of mortgages on secondary and vacation homes and the like, but not primary residences? That's clearly perverse, but there must have been some rationale... Right?

Conduct your own interview of Sarah Palin!

Cramdowns are just realistic (4.00 / 1)
I mean without the cramdown, the house gets "abandoned" by the Trustee and the lender can proceed to foreclose.  But in the cases the lenders are fighting about, the house will probably  sell for much less than even a Fair Market Value set by the bankruptcy court and at a time in the distant future meaning no payments in the interim.  

It is really just shortsightedness on the lender's part.

It is also the precedent of letting bankruptcy courts set Fair Market Value that they don't want to cave on.

[ Parent ]
Oh no... you mean Schumer telling me he supports 'Nationalization' (0.00 / 0)
could be 'bullshit' -- oh no that can't be true -- he's always been such an honest fellow


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