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Chapter 13 Cramdown Bill

posted by Bob Lawless

The Wall Street Journal is reporting that Citigroup is negotiating over the terms of a bill to give bankruptcy judges the power to adjust home mortgages in chapter 13. The article further reports that the National Association of Home Builders has dropped its opposition to the bill, although Citigroup says it still has not made a decision on what its final position will be. Credit industry opposition is the primary obstacle to passage of this legislation. If this opposition evaporates, the bill almost certainly will become law given its support among congressional leaders and the incoming Obama Administration. For background on how the law would work, see here.

UPDATE: Just as soon as I posted this, the news broke that a deal had been reached. This is a welcome development. Of course, the devil is in the details. If anyone has a link to the text of the legislation that would result from the deal, please post in the comments.


I'm not sure why this would be a bad deal for lenders, because if they have to foreclose on a home and resell it at market value, their processing and carrying costs could end up being more than a cramdown adjustment.

Why would any amendment be necessary beyond removing the "other than" phrase in section 1322(b)(2)? The provision would then say simply that a plan may "modify the rights of holders of secured claims" -- no exceptions. Simple but effective, it seems to me.

Amazing. Ben, I think its a concession for republicans (reaching across the isle and all). They hate Federal Judges having exercising those type of equitable powers. At this point any concessions with that type of amendment will help a ton of people.

It's funny and a little sad when I read headlines like "Citi, Senators Reach Mortgage Deal," as if Citi were a fourth branch of government.

The last paragraph of the WSJ article seems meant to highlight the irony here: "The U.S. government last year pumped a total of $45 billion in capital into Citigroup and also agreed to shoulder hundreds of billions of dollars of potential losses on the company's risky assets."

The Treasury has been criticized for buying preferred stock with no control rights over the funded banks, but apparently Citi still has control rights over the U.S. government.

It's S.61 but I can't find a link to it.

throwing contract law to the wolves is not a welcome development in my book. i predict that holders of mortgage backed securities will fight this law all the way to the supreme court if need be, as well they should.
modifications of mortgage contracts should be left to voluntary agreements between the parties to the contracts; it is in any event in lenders self-interest to avert as many foreclosures as is reasonably possible, so whatever looks like it may be salvageable will be salvaged anyway. as the 'hope now' effort has shown, for the most part the renegotiated mortgages become delinquent again in a short while as it were, so not much IS salvageable from the big bubble.
this law will have unintended negative consequences that will markedly outweigh the alleged positives; any putative creditor will think twice about extending a mortgage in the future if the judiciary can retroactively alter the contract as soon as the borrower is in trouble.
this will raise the cost of mortgages and delay the recovery of the housing market. one must nor forget, all the efforts of government regarding the housing market are aimed at artificially keeping prices up. this is a project doomed to fail - it merely delays the point of time in which the market's clearing level is reached, it can not avert the process from taking place.
in other words, it will ultimately considerably lengthen and deepen the economic pain.

Apparently banks are charities. Just listened to some bank spokesman on the public radio show "Marketplace". He said that if the bill passed banks would have to pass on the cost to future borrowers because of increased costs. Since the cram down bill only applies to existing mortgages, he can't be saying that future rates are going to be higher becasue of the greater losses that lenders are going to suffer on those loans. Those loans can't be crammed down so the losses on them aren't going to be any greater than they are under existing law.

However, what he says makes sense if banks are charities. In the past they could have charged more for home loans but they refrained from that, not because of competition, but because they are charities. They were planning on continuing this practice in the future, but if they lose money on cramdowns on existing loans, they will have to charge more on future loans to make up for the losses on the crammed down loans. They will be able to do this because they have been undercharging, and because there will not be any competitive pressures from new lenders who don't have portfolios full of crammed down loans.

On a macro economic sense, the only thing the cramdown does is recognize the true value of the home. The loss has already occured, and in under-water assets, the creditor takes the loss. The result to the creditor is really better under the cramdown because the same loss would be realized upon foreclosure and sale (unless banks become real estate holding companies). It is true a cramdown may tend to make bankers think twice about new lending, but to my mind that's a good thing.

One side-effect of this bill, if passed, that no one seemed to mention is that it would make the "toxic", mortgage-backed securities and derivatives "radioactive" and therefore worth even less...

I think the cram down bill is the real hope for home owners. I sell alot of homes and the only way people are going to get out from under these hard times is this other wise they are going to let their homes go. Homes will continue to drop. Banks have received billions of tax payers dollars and continue not to lend money-raise credit card rates to good customers-foreclose on homes without modifiying home mortgages- people want to stay in their homes but banks wont help them. By giving them 30- 90days extention does not change anything when they have to start making payments again. They cant afford the rate and terms. mnlakeplace.com

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