What's in a word (or 2?) Cramdown

Last Sunday's New York Times Magazine's feature, On Language, discussed the etymology and signification of the word "cramdown." (Or is it "cram down?" That's a separate debate that professors have with law review editors every year).

William Safire observes that cramdown is coming into popular parlance as bankruptcy becomes an everday topic and the debate continues about the mortgage modification legislation. Credit Slips guestblogger, the Honorable Eugene Wedoff, found a use of the term in a 1948 law review article and a 1944 judicial opinion. The term has a general use as a verb to indicate forcing unwanted treatment on creditors. In today's bankruptcy context, the term refers to at least two specific types of such treatment: 1) reducing a creditor's secured claim to the value of the collateral and 2) confirming a chapter 11 plan over the objection of a class of dissenting creditors. Law students often become confused when their professors use the terms in these two different contexts. I try to use cramdown only to mean the chapter 11 voting override provision and instead speak of "lien stripping" to refer to the writedown of a secured claim under section 506 of the Bankruptcy Code. (Of course, lien stripping is a misnomer, since the the lien remains on the collateral and should not be confused with lien avoidance. What is being "stripped" in part is the value of the claim.)

Safire suggests that the ugly connotations of the word cramdown may be hindering legislative efforts to pass mortgage modification. Senator Durbin's spokesman said that the appropriate term to describe his proposed legislation is "judicial modification." While not as colorful as cramdown, it has the virtue of reminding people that a write down in principal is NOT the only feature, and may not even be the most beneficial or widely used feature, of the legislation. Depending on property values where you live, when you bought your house, the type of loan, and future interest rates, debtors may find reductions in interest rate or reamortizations of their loans to be more helpful in reducing their monthly payments and avoiding foreclosure. Using cramdown as shorthand to describe the bill gives short shrift to its potential benefits when all the term may invoke for many people is the specific ability to reduce a mortgage to the value of a house.

Comments

[AMC]

Two things:

One, I don't think "judifical" is a word.

And, second, when a wholly unsecured mortgage is stripped in a Chapter 13 under 506, the the lien does not remain on the collateral, at least if the Chapter 13 Plan is completed.

In common bankruptcy parlance, I think it is more common to speak of lien avoidance under Section 522(f), or the preference and fraudulent conveyance provisions. Rarely, is stripping a mortgage called "lien avoidance" or "mortgage avoidance" - at least in my neck of the woods, where we don't go much for etiology (the study of causation) or etymology (the study of the orgins and changing meanings of words).

I do think the term "mortgage modification" is the better term for talking about the powers found in the new legislation.

Finally, the relatively positive Credit Suisse analysis of the mortgage modification bill is found here:

http://www.bankruptcylawnetwork.com/wp-content/uploads/2009/01/credit_suisse_bankruptcy_law_reform.pdf

[Katie Porter]

Thank you for the corrections. I fixed the typo (judifical to judicial) and changed etiology to my intended word, etymology.

[Mike Dillon]

"Judifical" may, in fact, be recognized somewhere in the world - but it may have been trademarked by Ms. Tenuta and there may be royalties involved so I'd use it sparingly until this can be confirmed. ;)

It's really great that CS is getting out in front of the problems and generating all kinds of market analysis data. Unfortunately, I am automatically (and possibly unfairly) suspicious of ANY data that CS generates with regard to mortgage or housing if for no other reason than they purchased Select Portfolio Servicing (f/k/a Fairbanks Capital Corp.) from The PMI Group and FSA back in 2005. The purchase negotiations had to begin while then Fairbanks was still settling USA/Curry v. Fairbanks with the FTC.

Add to that that CS people were directly involved with the negotiations surrounding the 2007 modifications to USA/Curry (I have the emails proving this) and I immediately, and possibly irrevocably, become wary of anything with CS fingerprints on it.

But that's just me... The CS analysis that *I* would like to see is just how many defaults/foreclosures Credit Suisse is going to allow Select Portfolio Servicing to manufacture in the coming years. Somehow I don't think any numbers will be generated but I could always be proven wrong.

[Patches]

How about "Equitable Mortgage Realignment" or "EMR"? Personally I like "cramdown" but heck, if it sounds too ugly, I'm not going to start a letter writing campaign over the name.

[Patches]

Just another option since "RE" might also be too scary. "Equitable Mortgage Alignment" or "EMA". OK for real last stab....

[AMC]

How about "Mortgage Optimization Method"?

What politician could vote against MOM?

[Patches]

LOL! I like that one better!

[Ben Goldgar]

"Judicial modification" is most certainly not the correct term. The proposed legislation would not allow judges to restructure mortgages, any more than the current law allows judges to restructure car loans. The legislation would instead allow debtors to propose certain modifications to mortgages in chapter 13 plans. If the proposed modifications conformed to the law, the plans would be confirmed -- end of story. I have never restructured a car loan, and under the legislation (should it pass) I wouldn't restructure mortgages, either.

In an era when the judiciary is immensely unpopular and people constantly rail against "activist" judges (whatever those are), it's vital not to paint a picture of black-robed eccentrics whimsically playing around with people's contracts, keeping in the bits they like and tossing out the ones they don't. That's not going to happen.

[Patches]

When a Servicer does the same act, "they" call it a "Mortgage Modification", even when they just do a forbearance. I know the negative connotation of "Judicial or Modification" but what else is it? Plan payments last only 5 years(max)and the Mortgage note (in theory) will last another twenty or so more years surviving the Bankruptcy and (hopefully) this mortgage mess.

[AMC]

Looking at relative "immense unpopularity", do you really want to call it "debtor's lawyer modification"?

[Adam Levitin]

Part of the problem is that there's some confusion as to what is being crammed down--is it a non-consensual deal being crammed down on lenders or the principal amount of the mortgage being crammed down to the value of the collateral? Given that all Chapter 13s are non-consensual, I think it has to be later. I'm not sure it matters, though. I used to think that cramdown was a very problematic term for the legislation. But then I started to find out that there are a lot of folks who relish the thought of cramming something down mortgage lenders' throats. So there might be cross-cutting effects to the term--some people are aghast and some are quite gleeful at the thought of something being crammed down.

[Mike Dillon]

Maybe stick with "RMBS"? Residential Mortgage Backed Suppository?

[Patches]

I like that one too Mike. Along the lines of Mikes "Suppository" theme.

I was thinking (and talking about WORK last night) with my wife loves to talk about work at 10:00 PM! The issue "Bad Bank", so my wheels were turning last night when they should have been in "veg" mode.

What if that "Bad Bank" just bought off all of the mortgages that went into 13 and subsequently rewritten. Like but more than a "Chapter 13 Mortgage Servicer". The "Bad Bank" would buy the troubled asset but the ultimate pay off on that purchase (over the long haul) would make money. Hey, it's our money anyway right? Its off the books for original holder (who or whomever that might be) but a source for a "return" for our public coffers. Eventually the ones that preform the best can be "released back into the wild" or sold for a profit later on.

I work with my wife BTW so I rarely ever get away from Bankruptcy even at home. I am not a nerd! I just talk about Bankruptcy almost every day of my life, sometimes against my own will.

[AMC]

Whatever you call it, let's hope it is more effective than the private sector 'efforts':

http://www.washingtonpost.com/wp-dyn/content/article/2009/02/02/AR2009020203163.html?hpid=topnews

Just a Band-Aid on the Foreclosure Problem?

Loans Are Reworked, but Many Borrowers Fall Behind Again

By Renae Merle
Washington Post Staff Writer
Tuesday, February 3, 2009; D01

Many homeowners who have been given a break on their troubled mortgages quickly end up in trouble again, a growing problem that is bedeviling efforts to stem rising foreclosure rates.

A recent study by the Office of the Comptroller of the Currency found that more than 50 percent of troubled homeowners had missed at least one payment six months after a lender modified their loan, and lenders and other researchers report similar default rates on modified mortgages.

The high default rate on reworked mortgages is complicating efforts to address a housing crisis that is already among the worst on record. It has sent government and industry officials scrambling to find new fixes as President Obama's administration pledges to spend $50 billion to $100 billion to help homeowners. A 50 percent recidivism rate "is an indicator that there are problems," said John C. Dugan, comptroller of the currency, whose office regulates some mortgage lenders. "Not just that the number is high, but that it keeps getting worse each month."

Many in Congress are questioning the effectiveness of loan-modification programs launched by the banking industry last year. "It's been going on for a year and half. The industry said, 'Don't worry; we have it under control.' It is painfully clear that sustainable voluntary modifications just aren't happening," said Rep. Brad Miller (D-N.C.). Miller is pushing legislation -- opposed by the financial services industry -- to allow bankruptcy judges to modify mortgages on primary residences.

[Patches]

Thanks for that Link AMC. Just read it. Got a little lost on the whole AAA stuff and how they calculate benefit and a what is a negative as it pertains to a Cramdown but I am pretty sure I got the gist. I learn something new almost every day on this blog. Great plug for Adam in there.

[PSP]

Just make it official:

Court Reviewed and Approved Modification for Debtor-homeOwners With Nothing

[Patches]

Took me a bit.. but I got it.... funny PSP.

[AMC]

Some folks seem to like the idea of cramming down the banks....

http://www.businessweek.com/investing/wall_street_news_blog/archives/2009/02/cramdowns_for_e.html

Cramdowns for All

Posted by: David Henry on February 03

That Congress is talking about cramming down investors who bought bonds made from bad mortgages begs a question: Why not do the same to investors in bonds from bad banks?

[Mike Dillon]

Take me out behind the woodshed and smack me around for the thread drift but if Wells Fargo can still afford to go to Vegas after taking $25 Billion of taxpayer money they're obviously not hurting too badly and should easily be able to swallow a little downward cramming...

http://www.verizon.net/newsroom/portals/newsroom.portal?_nfpb=true&_pageLabel=newsroom_portal_page__article&_article=1558434&_count=1

[beachdude]

A Mortgage Modification is a process whereby a home owner's mortgage is modified and both the lender and homeowner are bound by the new terms of the new mortgage. The most common mortgage modifications are listed below:

lowering the mortgage interest rate
reducing the mortgage principal balance
fixing adjustable interest rates within the mortgage
increasing the loan term throughout the mortgage
forgiveness of payment defaults and fees
or any combination of the above

Check out this public service site at http://mortgagemodificationinfo.org

[AMC]

C'mon Mike.

It's a Wynn/Wynn situation for them!

[Patches]

fo sure!

[Patches]

Can I take it back?

The idea of a "Bad Bank" acting as a Servicer of sorts for Chapter 13 Mortgage Mods. After watching CSPAN last night and listening to the COO for the FDIC testify, I would like to retract that idea. It seems as though HUD would be better equipped for that task. I learned that the FDIC would be managing the "Bad Bank" and frankly his testimony was awful. The man just could not answer straight. As I gleaned from the testimony, HUD has access to TARP money to expand their ability to restructure loans. The problem NOT ONE, "HOPE" rework was insured by Housing Administration so far. The lady (I forget her name) said that as of the date of the hearing, they were supposed to have helped 44,000 homeowners. She cited "qualifiers" had effectively stopped the majority of homeowners from even applying for "HOPE". ie. recent loss of employment, high debt to income, etc... As they were answering questions my TV suddenly turned off at 12:01 A.M. (A timer trick my wife uses to get me to bed at a decent hour) OMG! I am a nerd! Watching CSPAN at 12 a.m. listening to congressional testimony. UUUHGGG! Its OK I am a closet nerd. I'm incognito.

[Mike Dillon]

Oh, OUCH AMC!..LOL... I would agree with you but since WF announced that they were "reconsidering" the outing last night it may have turned into just a *Wynn* situation. I wonder what the cancellation/refund policies are at the Wynn...

I like the WF billboard posted at the bottom of MSFraud - http://www.msfraud.org