Go to the mobile version of this Web site.

Login | Contact Us | Site Map | Paid archives | Alerts | Electronic edition | Advertise | Subscribe to the paper | Today's Extras

Breaking News:

Subscribe

'Cram-downs' by bankruptcy judges lauded, decried

By John Rebchook, Rocky Mountain News (Contact)

Published September 27, 2008 at 12:05 a.m.

Text size  

More Real Estate

More stories »

Helping millions of homeowners who face losing their homes or who are already in foreclosures has been the battle cry of politicians from both parties and dozens of nonprofit groups.

It sounds good on paper - and for sound bites. But some experts say that as well-intentioned as it is to help Main Street and not just Wall Street with the $700 billion bailout plan, it could have unintended consequences that could make matters worse.

"I'm such a cynic about Washington," said Frank Raiter, the retired managing director of Standard & Poor's Rating Group. "I'm watching all of these riders and amendments that various people and groups want to put in there, such as cram-downs in bankruptcy court."

Cram-downs, which would allow bankruptcy court judges to lower the mortgage amount to borrowers who are in trouble, was endorsed by about three dozen groups and associations this week, including the AFL-CIO, the Black Leadership Forum and the Center for Responsible Lending.

But Raiter said it would lead to a flurry of bankruptcies in order to lower homeowners' mortgage costs.

"Let's say you have a $200,000 mortgage and your house is worth $150,000," he said. "A judge in bankruptcy court agrees to knock it down to $150,000 and probably lower your interest rate, too.

"You realize you just have to not pay three mortgage payments (to go into foreclosure), file bankruptcy and knock $50,000 off your mortgage."

But Maureen Thompson, legislative director for the National Association of Consumer Bankruptcy Attorneys, based in Arlington, Va., said that is a "red herring" and will not happen.

"You can't go into bankruptcy court just as a way to get a lower interest rate," she said. "There are very strict IRS guidelines for filing bankruptcy."

Thompson said the current economic crisis was "born out of foreclosures and there are more of them coming. What we've seen so far is the tip of the iceberg. The idea of using bankruptcy court to take down the loan amount to keep people in their homes, is the one solution that would cost taxpayers zero dollars. It absolutely should be part of this bill."

The concern in the industry is that cram-downs would drive up the cost of borrowing for future home buyers, said consultant Brian Chappelle, principal of Potomac Partners in Arlington, Va.

"If a judge tampers with a loan contract, the unintended consequence is that it is going to cause a rise in the cost of future mortgages," Chappelle said.

"That's because everyone involved in the process - the originator, the buyers of the bonds, the servicer who collects the mortgage payment and distributes the funds, has to factor in that in the future a judge may change the terms," Chappelle said. "That is the risk."

Peter Lansing, president of Universal Lending, one of the largest privately owned mortgage banking firms in the Denver area, said borrowers as well as bankers who made what are now called "toxic" loans must take responsibility.

"When did we get this idea that if I'm making money on this investment called our home it is my money, but if we lose money on the home, the government has to bail me out?" Lansing asked.

Comments

  • September 27, 2008

    7:15 a.m.

    Suggest removal

    WarrenJimmyBuffett writes:

    "Peter Lansing, president of Universal Lending, one of the largest privately owned mortgage banking firms in the Denver area, said borrowers as well as bankers who made what are now called "toxic" loans must take responsibility.

    "When did we get this idea that if I'm making money on this investment called our home it is my money, but if we lose money on the home, the government has to bail me out?" Lansing asked."

    But Peter Lansing probably thought it was a good idea to give subprime and Alt A loans (liar loans), because the upfront fees to him were really good.

  • September 27, 2008

    6:34 p.m.

    Suggest removal

    StillUndecided writes:

    Warren, You have hit the nail square on the head here. Everyone who has ever gotten a loan knows how much paperwork is involved. Every single detail is documented. They know exactly who originated the loan, who the appraiser was, who approved the loan, etc., etc. They need to go after all of these people and hold them accountable and make them pay back their fees on any loan found fraudulent.

  • September 28, 2008

    6:15 p.m.

    Suggest removal

    tleejr writes:

    "When did we get this idea that if I'm making money on this investment called our home it is my money, but if we lose money on the home, the government has to bail me out?" Lansing asked.

    Umm...perhaps the '90's savings and loan bail-out, maybe the current bail-out? Since it appears that only the individual is ever held to pure free market accountability standards and never institutions. The very liars who teach us how effective the free market is at conduction evolution via survival of the fittest are now begging to not be eaten. If WaMu is going to sell for 3/10ths of a cent on the dollar, why can't they just sell those loans to the mortgagee for the same price. What's the difference? I'm certain I can find a solvent institution that will loan me the money to buy my mortgage out at such favorable rate. But no-one is calling the individuals to involve them directly. Why? These pennies on the dollar buyouts would be secured with real property. Instead our communist leaders are simply placing the burden of foolish gamblers on the backs of our great grandchildren who will be forever indebted to the Chinese who buy bonds so we can print money worthless currency, based on nothing but the good faith and credit of a singularly discredited financial system. This is the most blatant failure of deregulation of financial markets ever witnessed in the time of written history. But the bankers just keep blabbing and the common man, losing his house, still gets left holding the bag and renting a box. A few prosper on the backs of the many who are poorly represented. (Elected representation isn't good enough these days - representatives are commanded by those who steal from the taxpayer and donate the proceeds as campaign contributions). Never has the corruption been so bald-faced and evident, and we the people will once again fail to act in a radical and revolutionary enough fashion to effect real change. It is time to burn the rich man's keep to the ground folks. Let's transfer the wealth back where it belongs, to those who create REAL value backed by tangible goods. The butcher, the baker, the candlestick maker. Not the "creative investment instrument" inventor.

  • September 30, 2008

    8:53 a.m.

    Suggest removal

    mmannino writes:

    tleejr,

    Your assertion that only the individual is held responsible is false. The housing financial industry is in disarray. Investors holding these loans have lost large amounts of money. Shareholders of failing institutions have lost large amounts of money. Many layoffs have occurred in this industry. Individuals with skills in this industry cannot find work. It is true that individuals involved in the original transactions have profited. Unless there is proven fraud, that money has been legally earned. The vast majority of home owners involved in these loans made foolish decisions. They should suffer the consequences.

    I see three major lessons in this crisis. The first lesson is a failure of regulations, not deregulation. Lending institutions were encouraged and forced to lend to individuals who were not credit worthy. To make such lending affordable, gimmicks were used such as low initial rates, interest only payments, and no down payments. Risky lending practices were forced on lending institutions by the Community Reinvestment Act and the politicization of Fannie Mae and Freddie Mac. These risky lending practices spread beyond the legal dictates of the CRA. The solution is to repeal or radically remake the CRA and associated law.

    The second lesson involves the derivatives market. The impact of these bad loans is magnified by the usage of derivative instruments bringing a large amount of leverage to the financial industry. I believe that additional regulation of derivatives is needed.

    The third lesson involves credit rating agencies. These agencies failed to provide reasonable risk assessments about the quality of mortgage debt. There are allegations that these agencies compromised the ratings for business from investors selling the mortgages.

  • September 30, 2008

    9:13 a.m.

    Suggest removal

    mmannino writes:

    StillUndecided,

    Your idea is entirely unworkable. Proving fraud is very expensive especially years after the transaction. High profile cases will be prosecuted obviously. The cost of large scale investigation of housing transactions will overwhelm the benefits. I do not believe that the vast majority of transactions could be proven as fraudulent unless the definition of fraud is retroactively changed.

  • October 1, 2008

    11:13 a.m.

    Suggest removal

    tleejr writes:

    http://www.businessweek.com/investing...

    The Community reinvestment act is older than the S&L crisis of the '90's mmassimo. IMO your assertion is faulty.
    It was stockholders and institutional investors driving the creation of derivitives, time for that false and inflated value to be driven from the market, now, instead of continuing to prop up the inflated value of real estate the same way that commercial real estate was propped up by the taxpayer in the '90's. To save the same risky operators who did it all over again. Enough is enough. One way or another mortgages will be sold for pennies on the dollar, it's just that in the US, we won't let them be sold to the mortagee at that value, only to the institutions who's practices failed them. It's pure cr^p, it's been happening for generations and it continues to fall to the taxpayer to bail out the yacht owners who cry and snivel about having to walk in the shoes or pay the dues of the common citizen. Jeb Bush imploded an S&L chain with absolutley stupid managment, wo what did the electorate do? Put him in charge of Florida where he presided over the most controversial and contested federal election in History. It is time for the liars and cheats adn fear mongers to be exposed, let their institutions fail and let's return to a cash economy for a while and experience the TRUE meaning of "market value".

Post your comment

Registration is required. Click here to create your free user account, or login below.

Comments are the sole responsibility of the person posting them. You agree not to post comments that are off topic, defamatory, obscene, abusive, threatening or an invasion of privacy. Violators may be banned. Click here for our full user agreement.




(Forgotten your password?)




News Tip

Know about something we should be reporting? Tell us about it.

Sponsored links



Reprints