Cram Down Crunch Time

Congress needs to finally enact a bankruptcy reform bill that includes one of the few real tools for breaking the grip of the devastating downward foreclosure spiral. There are many sound economic and policy reasons for Congress to provide a judicially approved "cram down" possibility for homeowners. Yet one basic reason gets less mention -- it is simply a matter of fairness.

Few Americans realize that single family homeowners living in their own primary residence are the only real estate owners without cram down protections in bankruptcy. As U.S. Bankruptcy Court Judge Louise DeCarl Adler has aptly captured it, "we could always rewrite the loans on John McCain's second through ninth homes but not on his first." Donald Trump wouldn't -- and couldn't -- sign away his right to have a bankruptcy judge reduce the principal mortgage balance of a loan on one of his properties, but a homeowner starts out with Congress having previously taken that option away. Maybe with 1 in 5 families with a mortgage owing more than their house is worth -- most of whom borrowed within their means when they first took out their loan -- and 8 or 9 million households still potentially facing foreclosure, Congress will put homeowners back on equal footing with real estate moguls.

David Abromowitz is a Senior Fellow at the Center for American Progress, www.americanprogress.org

Comments

[californiadreamer]

One aspect coming out of the AIG scandal is how AIG used the taxpayer bailout money to pay off their obligation to banking interests such as Goldman and BofA. These banks had bought credit default swaps from the AIG financial services program that is at the center of the bonus outrage. Essentially the taxpayer gave AIG money to pay off their obligation to BofA and other banks when the mortgages did default. In an AIG bankruptcy scenario there would have been not pay off. The banks would have had to absorb their loss. Now banks want to avoid a judge's Chapter 13 haircut. The fact is, homeowners didn't have the same options as did the mortgage lenders. No one asked me if I wanted to hedge my bet on my mortgage. What if homeowners were able to take out insurance that would pay off their mortgage if they lost their equity, or at least pay off the lost equity. That's the kind of hedge against risk the banks were able to get and that is why we are in a financial crisis. Fairness is an issue. The banks should not get all the breaks; the homeowner should get his home restored to an equity position.

[dcrinaz]

What is taking the darned Senate so long to pass H.R. 1106? They need to get off their collective rear end and get this thing passed without modifying it to favor the banks who caused this mortgage mess to begin with. Come on, Senators, every day you delay, hundreds of Americans will fall into foreclosure, thus assuring that principal source of wealth for most Americans disappears and that the credit markets, oftentimes based on the value of a house, will not recover.

[WorkingClass]

Any new legislation should include a cram up provision as in take this loan and cram it.

[freshnotbitter]

I had my own idea on "cram down" but had some problems with how exactly it might backfire so I did not mention it. However, it goes like this:

When the bankruptcy judge writes down the principal on a home he replaces the amount of reduction, dollar for dollar, with a "treasury balloon" which is an amount that is paid to the bank by the US Govt and placed on the property as a lien that simply stays on the house's deed and is only paid in case the house is sold. When the house is sold the treasury lien is satisfied first, before the mortgagee bank and owner receives theirs.

This bridges the gap between those who say that the cram down unfairly reprices the house for those who did wrong, thereby rewarding the delinquent, and the banks who will not want to give mortgages anymore if they know that at anytime the mortgagor can simply go to court and have his principal reduced.

The question is if such a plan can actually work well in the real world, at the end of the day. I can't be 100% sure. It is a plan which has many sweet advantages but perhaps too many thorns.

[baddadd47]

My wife and i sold our home in Dallas and moved to California in 1999, we took the money and used half to buy private gold at about $350 dollars and ounce and the rest we split between saving and investments, I say this because as some here have posted it is people like me that can afford to buy a home now but I wont as I have no intention of watching my nest egg drop staring day one, thank God I listened to my money guy.

I have a great job and have no intention of leaving California as yet but I would rather pay rent than property and school taxes in a state that and country that punishes success. buy gold( ist only going to go up for the next 5 years at least) and be careful in the market.

[drymartini1]

I am ok with rewriting mortgage contracts. its fair and its helpful to homeowners. yeah!!

BUT, i dont want people complaining EVER about these 2 things.

1) If the law is passed, very few new homeowners would ever be qualified for a new home loan. it figures. home mortgage is "secured lending" and hence the lower rate compared to credit card (which is unsecured).

bankruptacy change will make the "secured" lending at risk because you cant fight the bk judge. so lesser people have to qualify. thats a good thing we all agree.

but how much lesser.I am already seeing the moronic senators complain banks need to start lending...to who, the borrowers who have recourse to bk judges now. better make sure those borrowers wont be deadbeats if you lend to them.

2) Rates would have to go up so no complaining there. if you have recourse to bk judges and there will be a lot of non performing loans. to make up for that and profits, you need higher rates.

i am sure people would accept these 2 evils of that law. i sure do.

[KillTheMessenger]

Cry me a river. First you make a poor real estate deal. Then you realize that you can't pay for it. Then you are not willing to walk out (which you always can!). And then you want everybody else to pay for your series of grave mistakes? And by means of a mechanism that in most cases won't even save your behind?

We should rename this country the United States of Do Over!

[Rule Of Law]

Gosh, ktm, you've just described the modus operandi of every Wall Street investment bank and hedge fund--AND YET YOU NEVER TAKE THOSE GUYS TO TASK AS YOU DO YOUR FELLOW AMERICANS.

why?

[californiadreamer]

As Congresswoman Walters says in another post: "They run this place." Meaning the banking lobby in Congress. And yes, they do not want the cram down, but I hope enough of them have heard enough from their constiuencies to at least pass the current legislation. That will get the ball rolling. What will really work is some kind of grass roots organization that can show the politicians that their jobs are in jeopardy is they don't begin to follow the wishes of their constituency and not pander to the desires of the lobbyists. Once they understand that the voters are who put them in office, not the lobbyists. Once they understand that their constituents are informed and aware of how they vote on key legislation suich as the housing bill allowiing judges to modidy mortgages, then the Congress will listen to what their needs are. As long as politicians-- Obama, Biden, whoever needs campaign funds, think they can take the lobby money and fool the people into voting for them, that's what they will do. We need to organize through informative blogs and get the word out to our neighbors.

[outnow]

HuffPost's Pick

Eliminating the "cram down" enabled the bankers to run the sub-prime fraud. It is a two-step process. Biden voted for the bankruptcy bill because he is from Delaware where the credit card companies incorporate. Usury is legal. Debt Jubilees are not.

We must eliminate the fraudulent bankruptcy law that was passed to help enslave wage earners. Just follow the money on who lobbied and funded the Bill and its supporters on behald of Wall Street and the usurious bankers. Unfortunately, you will not like what you find - Democrats pushed for the Bill. I wish I could say that it was only Republicans.

Restore cram downs and the real estate markets would quickly find a bottom, real estate could not be sold for more than a wage earner could afford. Reducing the interest and balances would enable the wage earner to pay off his credit card balances, something that the finaciers do not want.

[dnpvd51]

The only way for this market to find a bottom is for the government to get out of the housing market. If you are a renter wanting to buy and you have saved your money, why should anyone choose to buy now with the government changing the rules every other week?

People will buy houses when the government gets out of the market so people can know the true price of a house. How can anybody spend that kind of money on a house with all of the market manipulation going on?

[Baltotoast]

You are delusional. Interest rates will go up and less qualified people will not get loans as the banks won't take the risk if there is a chance the mortgage will get "crammed down" their throat. Personally, i am ok with that, but don't delude yourself into thinking this will help anyone get a new mortgage.

[research]

After all, if you can't scr$w the home owner, there i no reason for the bank to lend.

[Rule Of Law]

Hey Out, I thought they stopped giving these picks--good on ya, mate!

Then bankers crammed plenty down our throats with their predatory scams. Turn about is fair(er) play!