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Vote on Tuesday

posted by Elizabeth Warren

The pending bankruptcy amendment that would let judges make a downward adjustment on mortgages when the loan exceeds the value of the property goes to a vote in the Senate tomorrow. It will take 60 votes to push the bill forward.  The mortgage lenders think they can block it, giving the Republicans a chance to kill the bill through filibuster.

Larry Summers weighed in via his column in the Economist.  He supports the bill as a way to create a mechanism to get the borrowers into deals that are good for the borrowers and cheaper for the lenders.  He points out the the current ideas of jawboning the lenders just isn't working.  But he seems to be having some trouble with the details of how bankruptcy works.

Despite his support, Dr. Summers would change the bill by letting the lenders have some upside appreciation if the market recovers because, he says, that already happens in business bankruptcies.  I think Dr. Summers needs to re-read the Bankruptcy Code.  There is no upside participation for the unsecured portion of secured debts.  Unsecured creditors (including the unsecured portion of a secured claim) get pro rata participation in any distributions, but there is nothing special for mortgage lenders. There may be equity participation in a Chapter 11, but only if such participation is needed to secure a majority vote of the creditors for the plan of reorganization.  Moreover, that participation goes to all the creditors and is not based on specific property appreciation.  It is simply an equitable ownership in the business--a concept we don't have for live human beings. 

Right now this is the only bill pending in Congress that would have any meaningful impact on the slide in the real estate market.  The bill would provide two huge benefits:  It would put an estimated 500,000 families into long term, permanent mortgages that they could afford, and it would cost investors far less than a foreclosure. Best of all, it would force the write downs to be absorbed by the investors, not the taxpayers.

The mortgage industry is opposed.  Perhaps the industry believes it can squeeze out more by talking people into handing over the keys to their homes or in pushing through to foreclosure. Or perhaps the industry believes that if things get bad enough, the government will bail them out.  Either way, the investors don't want to have to write down the loans in bankruptcy.

I'm very glad to see Dr. Summers support for the basic idea, and I hope he sticks with that. His basic point is right:  we need a way to untangle the mortgage mess, and the bankruptcy bill is the only game in town. 


What about responsible citizens who have made sacrifices to live within their means?

Let them all fail: Investors, borrowers and lenders.

"The mortgage industry is opposed. Perhaps the industry believes it can squeeze out more by talking people into handing over the keys to their homes or in pushing through to foreclosure. Or perhaps the industry believes that if things get bad enough, the government will bail them out. Either way, the investors don't want to have to write down the loans in bankruptcy."

The idea of millions of home "owners" mailing in their keys is the nightmare scenario for lenders. As far as a government bailout is concerned, unless the lenders expect the government to prioritize reducing their pain over reducing the cost of a bailout to the taxpayer while appraising the collateral, a bailout would accelerate the decline in home prices (not necessarily a bad thing for anyone other than the mortgage industry).

[His basic point is right: we need a way to untangle the mortgage mess, and the bankruptcy bill is the only game in town. ]

I'm surprised you're saying this, as most of your work (that I've read) shows that the Ch 13 system is a joke.

IMO, it's one of the biggest systems of institutionalized fraud in the country.

How can you think this helps when the Ch 13 failure rate is so high?

I've worked with MANY homeowners who've been through the ringer, and they make 2-3 years' worth of payments and end up owing MORE than they did on day 1. Taxes not paid, statements not sent, added layers/levels of difficulty in communicating with the lenders due to "compliance" with BK law... the list goes on and on.

Based on what I see, adding these provisions will only give false hope [HOPE?] to borrowers.

One question I was wondering if you have the answer to: if the plan is dismissed, do the cramdown provisions vanish, reverting back to the original terms?

Well as it stands now, if we cram down on a vehicle which we can only do now if the debt is 910 days old if the chapter 13 case is dismissed the creditors rely on their contract and state law remedies for the recoupment of their losses. ie. repo, deficiencies’, lawsuits to collect deficiencies’ etc..... Duhh! Mortgage contracts pass thru bankruptcy if not paid. Your logic seems a bit jaded in that when a bankruptcy judge modifies anything its usually by Order and not the redrawing of the contract. Currently 11 U.S.C. 1322(b)(2) does not let bk judges modify mortgage contracts by statute or order. The only way your question would be valid is if the code was changed in a way that forced mortgage co. to modify its contractual terms by the signing of a new contract. Most likely it will be done by order. The order is consummated by Confirmation BUT confirmation is not ultimately consummated until discharge by the completion of the confirmed plan. THEN THEY ARE STUCK! Currently, if a 13 is dismissed the orders go with them aside from judgments on Adversaries that often survive dismissed bankruptcies depending on the type of action. Adversaries are Lawsuits BTW and can range in the type of action from TLA's to FDCPA, Violations of Bankruptcy law to dischargability issues...etc..

You have the typical (Reaganomic) creditor attitude. Boo hoo, mortgage creditors have to comply with federal bankruptcy law! Waaa. Poor them. The way you talk Robert , makes it seem like mortgage lenders, brokers, bankers, servicers are poor innocent little lambs being beat down by the “BIG BAD” Chapter 13 Bankruptcy system…. Poor you. You must hate them reviewing everything, making sure every payment was credited correctly…… at an affordable rate to boot! What about all those poor investors out there purchasing MBO’s aka Asset backed securities ??? What about their plight? GIVE ME A BREAK!

If those houses had appreciated in value, would the homeowners be sharing their profits with me? My husband and I waited to buy a house because we realized prices were unrealistically high. Now the federal government is going to punish us by taking our tax dollars to help house speculators and by propping up those absurd house prices with various schemes. Plus, house speculators are all over the news lamenting that they "only" get to stay in their houses for six to eight months after they stop paying the mortgage! When do I get six to eight months of free rent? I can't believe how screwed up our society is, when the thrifty and patient get screwed to provide more goodies for the greedy.

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