Tweet
At the insistence of the “centrist” democrats under the leadership of Ellen Tauscher, and with the cooperation of Blue Dogs, the Bankruptcy Cramdown has been made more favorable to the banks that started the entire thing, and the investors who trusted them.
The original bill made it easy for the homeowner to file Chapter 13 and write the mortgage down to its current market value. In doing so, it gave the homeowner a strong bargaining position. The amendments bog down the process in a thicket of bureaucratic nonsense, and water down that bargaining position to next to nothing. Jane described the changes here, so I won’t repeat them.
One group of amendments practically requires the homeowner to try to participate in the non-bankruptcy work-out plan of President Obama. This site contains information about this program. This plan thrills the financial industry because the Treasury bears part of the loss, and pays servicers to make the modification. It also contains a provision that conceivably might encourage investors in Residential Mortgage Backed Securities to allow the modifications.
The Obama Plan really does mean that taxpayers are paying for the costs of keeping people in their homes. This defeats the real value of the cramdown, which imposes losses solely on the investors who bargained for the risk, and stood to profit handsomely if it paid off. This is a real moral hazard issue. But Blue Dogs, those paragons of financial morality, are happy to pay off investors with taxpayer money.
While the Obama Plan provides some incentive to investors to permit the modifications, it does not force them to do so, and there really isn’t a mechanism to get them to agree anyway. The net effect is likely to be that securitized mortgages are not going to participate in the Obama Plan. After all, one of them has already filed suit to stop servicing companies from modifying mortgages.
I think another reason bankers prefer the Obama Plan is that they thought many homeowners would try to negotiate with them without lawyers. However, Congressman Conyers inserted a provision explaining exactly how homeowners comply with the requirement to provide income, expense and other information. They fill out bankruptcy schedules and send them to the same place they send their payments. This should encourage homeowners to get lawyers involved at an early stage, so the homeowner has someone to help in the negotiations and protect them from unscrupulous lenders and badly-trained employees.
A second group of amendments is designed to restrict the exercise of judgment by Bankruptcy Judges. This group requires the use of FHA appraisal guidelines, requires consideration of certain aspects of the Obama Plan in deciding how to modify the mortgage, and requires fixed monthly payments. Each of these is insulting to the intelligence of the lawyers and Judges who operate the bankruptcy system. Are we so stupid we need the banks to write language insisting on the use of FHA appraisal guidelines, or figure out the least loss alternative for banks and investors? Adjustable monthly payments are a great idea in a significant number of cases. There is absolutely no need to add the provision about people who can pay their home mortgage payment. Those people aren’t going to file anyway. And, do we need a study to see if Bankruptcy Judges are disciplined for their work on mortgage modifications as suggested in the Rule for consideration of the statute?
There are three other costly provisions in the amendments. One restricts the amount of the commission Chapter 13 Trustees charge for their services. They are required to do extra work to make sure the Debtors are not cheated by lenders, so the restricted payment is a bad idea. Nevertheless, they agreed to the change. Everyone takes a haircut, including the people fixing the problem.
The FHA and the VA announced that their insurance would not cover the losses to lenders resulting from cramdown. They will pay the loss on foreclosure, but not from cramdown. The bill says they may make the payments. We have no idea how much that will cost. What we know is that the insurance premium did not cover that risk, and the regulators tried to protect public funds in a responsible way. It looks like this change was made to mollify the Mortgage Bankers Association.
Finally, the amendments take more money from homeowners if they sell during the five years after filing. I can’t think of a justification for this. The point of the cramdown is to encourage the homeowner to keep paying. Why take away the incentive to do so? Why encourage the homeowner to stay in the house for five years to protect the equity so painfully built up?
All of this is about banks and investors. It has nothing to do with protecting homeowners. It is good to know whose interests Tauscher and her cohort want to protect.
Update: here’s a good description of the Obama Plan.
29 Comments
You make several important points, many of which the MSM miss entirely. Thanks. Banks, and collection agents more so, often negotiate negligently or in bad faith. Often that surfaces through staff training and incentives.
One example is to mimic the pundit’s opinion or rhetorical question. That is, to suggest a homeowner’s rights don’t exist. “I don’t think you can do that.” “Can you do that without XX?” It’s not a statement of fact; it certainly isn’t practical or legal advice. But like a real estate broker playing both sides of the deal, they imply their accuracy or maneuver around the need for more time, a neutral opinion, or the help of a professional with an obligation to promote the consumer’s interest over the bank’s.
Another example from consumer debt collections practices is the trick of eliciting a single small payment from someone behind in their payments and in a debt whole. It works; most debtors would like to pay their debts as they come due and guilt trips go a long way.
A small payment doesn’t pay the amount of a single late fee, much less reduce the interest or principal owing on the debt. But it does restart the statute of limitations on when the debt is no longer collectable, giving banks anywhere from two to six to twenty more years to collect. The devil, as Ms. Tauscher well knows, is in the details.
Another good point you raise is that taxpayers ought not to subsidize bankers’ losses. They could usefully subsidize the process of working out dets for severely troubled borrowers. They do so already by paying for the bankruptcy court system. They’ll also do that when using Obama’s Plan or something like it.
Most severely troubled debtors are under enormous personal and financial stress. As we keep repeating, consumer bankruptcies are largely the result of chronic sickness, job loss or divorce. Banks, on the other hand, and other players in the workout and debt restructuring game do it for a living. It’s only consumers who are at the end of their rope when they start the formidable task of asking “the system” to help.
The law used to send responsible borrowers who had suffered a severe and permanent change of circumstances to debtors’ prison – when the sun never set on Victoria’s empire. Since then, the notion of a practical fresh start has replaced draconian poor laws. It yields higher net paybacks for creditors, allows families to stay together and rebuild themselves, or to break themselves up in a way that creates a better chance of their members rebuilding on their own.
The best way to create a fresh start is to reorganize a debtor’s finances as of the date he or she files. Assess what’s there, assets, real expenses (not off a chart), income, etc. A few exceptions already allow later modifications, such as a fundamental change in circumstances within six months. A new, more high-paying job, for example, or receiving an inheritance or winning the lottery. The example suggest how rare those events are. Especially now, when nearly half of all employers use a credit score as a routine screening mechanism for job applicants. (A better Catch-22, unrelated to ability to perform work, is hard to imagine.)
That’s a good catch about the FHA and VA loan repayment part. I agree this is a giveaway to the banks. It always comes back to the fact that the banks want someone to pay more for their crap assets than they are worth.
As a solution to the mortgage crisis or as help for our foundering economy, this is a non-starter. It bears repeating that the housing bubble burst in August 2007 and the banking collapse happened in September 2008. In the months since the September 2008 meltdown, trillions have been poured into the banking system. Yet even though the housing crisis has been with us a year longer and affects millions of families, the government has done nothing to really help them. This is true about this program as well. It is meant only incidentally to help some homeowners, mostly it is about steering even more money to the banks.
mark my words. Any one who has followed my posts knows that because of the way they were lying and cheating in my mortgage I predicted this current economic banking crises. They are trying to cover up the amount of accounting fraud in these loans. If the judges are allowed to modify it gets rid of the legal fees, the property inspection fees, the check cashing fees, the miscellaneous fees. These fees are the only thing that kept me from being able to make my payment. I have read post after post of others just like me, who went through a rough spot, got behind briefly but recovered and were able to make their payments. (different than the ARM’s which the republicans have LOVED to talk about). Once I was behind they violated one TILA and RESPA law after another AND engaged in accounting fraud by not applying payments and escrow properly. Thousands of others were treated the same way. My bankruptcy judge asked them to remove the fees but could not “force” them to do it. It is these fees that makes my loan unaffordable not the original payment. My case is not unique…there are thousands of complaints of accounting fraud.
They don’t want the bankruptcy judges to find out how much law breaking has been going on. Once that cat is out of the bag…they are in big, big trouble. I have been right every step of the way and writing about this since 2004.
They are cheating, committing fraud and they will keep it up unless the law stops them. This is part of the cover up.
I talked about mortgage fraud with my hair dresser today. He’s a pretty saavy guy but doesn’t follow these things closely, but he was pretty up to speed on the subject, though quite surprised that it was as widespread as what he is reading.
I spent some time on the road in the last couple of weeks, and I was amazed at the number of perfect strangers who wanted to talk about the economy and had a pretty good working knowledge of the nature of the problems. One strong theme was a deep desire to wallop Wall Street.
Most of my acquaintances are well educated and avid consumers of the news so I don’t have much insight into what “real” (h/t Sarah Palin) Americans know about the situation, but I’m not surprised to hear that they are very well aware of what’s going on. When I worked as a professional economics forecaster, I followed the consumer sentiment data closely, as a keen leading indicator of consumer spending. The survey measures what you are picking up anecdotally.
it’s really a shame there isn’t much leftwing populism to help mobilize people for change. worse, we’re leaving a vacuum for rightwing populism
Your crystal ball is clear indeed, selise.
A critically important ‘opportunity’ is slipping by.
Soon, too soon, we may realize … but probably, too … late.
Your long-ago suggestion that we have coherent ideas to articulate to Obama, are just as important (I think more so) when shared with many others.
People do ‘get’ what has happen and, if that understanding is allowed to languish, then we shall all, doubtless, have reason to regret our inaction.
A vacuum, which as you say, will too readily (and easily) be filled by a revitalized, very angry ( verging on madness), and powerfully demagogic GOP …
it’s not just the crazy rigthwingers who are pissed off. i am too. and so are lots of usually apolitical folks. in the absence of some honest (as in useful and not based on misinformation or misdirection) leftwing populism directed at the centers of power that have created this mess and refuse to deal with it responsibly, the pull of rightwing populism will be felt even by us (see “buy america”).
The ‘anger’ you speak to is widespread, the ‘madness’ I mention seems to always rise again, phoenix-like. They are not the same. Legitimate anger is what many of us are feeling. But the ‘madness’ is something which (or ‘who’) appeals to the basest of sensibilities and to the too-easily frightened and manipulated, those who wish to be told what to do, what to think, and, especially’ what to ‘believe’.
The right-wing ‘madness’ controls and contrives those myths which blind us to truth (for example the ‘myth’ of those ‘too big to fail’ obscures any real sense for those too small to matter).
that’s a good point about the difference between anger and the “madness” – but i don’t think it’s limited to the right wing any more. i saw it in almost everyone after 911 (even here in liberal MA). we became a lynch mob not interested in the rule of law or even that most basic premise of the rule of law: that whatever the rules are they must apply equally to all and that means they must apply to ourselves as well. and it wasn’t bush or even the rightwing that brought us to that point – it wasn’t even our anger. it was our inability to use and direct that anger productively.
i know for lots of people the bush years have been a big wake up call and there is rightly a lot of grief over what has been done and lost. but for me the wake up call was the madness post 911. something was lost to me then and i will never see my countrymen and women the same.
of course i should have known it before – that we too, just like every other group of human beings, are capable of losing our way. but i still had the illusion that we were different – maybe not all of us, but certainly the liberal, the compassionate and the thinking among us. it’s comfortable to think it’s only the right wingers. but it’s just not true.
The ‘insanity’ which appeared to grip many after 9-11, is not quite the same as the ‘madness’; but both do inhabit the region of little or no thought. The essential humanity of those who suffered the momentary blood-lust, soon compelled their return to both humanity and sanity. Those who play to the madness appear to have little but their pathologies to motivate them.
But, as human beings, we are all capable of flights of un-reason, despair and even of displaying thoughtless inhumanity towards others, including those whom we profess to love …
Your greatest gift to the rest of us selise, is, always, ‘perspective’. And your willingness to turn such perspective, when you deem it appropriate, upon yourself, first.
“if loan contracts are set aside due to violations in the law”;if treaties, constitutional law,USC violations aren’t prosecuted, why would loan contracts be set aside despite such contracts being in violation of law(e.g ,fraud).
As towards ‘rightwing populists’, call them what they really are: fascists.
Here’s the wiki about ‘populism’
And everyone needs to spread the word about what this book reports.
Still, the rule remains: Money talks, speech walks.
Good luck to that with Wall Streets driving the econ recovery, the Treasury Dept.
There’s more than enough basis to go after these firms for RICO and for all sorts of fraud.
Where is the DOJ?
If they did most of these titans of finance and industry would be convicted and should be behind bars. never gonna happen because we need to “save our economy” and that means to institutions which make up this economy… never gonna happen.
Wait for summer for things to get hot.
If the TILA was violated, and the judge knows about it, that forces recission of the loan.
Who’s giving you advice? Whoever it is, get differend advice. The TILA act has real teeth.
TILA = Truth in Lending Act.
this may relate to something i asked masaccio about recently. it’s a repeat, so if you’ve seen it before, please just ignore me.
from 2007:
if loan contracts are set aside due to violations in the law, what would happen to the MBSs? would the investors be SOL or would they have recourse to sue?
Yes…and let me explain. I contacted the A.G in my state, they got involved and fined Homecomings financial GMAC. This did absolutely nothing to help me. By this time the foreclosure was imminent. You have to document two months of the “behavior” by the bank. Then it takes 30 days for the A.G to “investigate your paper work and documentation”. Then they send a report to the “offender” who has 60 days to respond. In the meantime they never changed their communication with me. They continued the behavior and paid the fine.
The bankruptcy judge could not intervene because by the time of bankruptcy this issue had passed. The TILA law violation of not communicating with me while in foreclosure may seem innocuous but this time period was used to escalate the loan, increase miscellaneous fees, and pretty much great a debt that was “unreasonable” and impossible for me to pay my way out of.
What the judge witnessed was “accounting errors”. We can’t say it was “intentional”. They pulled me into court twice and said I had not paid my payments and that they wanted out of the bankruptcy protection so they could foreclose on the loan. I had been making my payments and could prove it. They hauled me into court twice, but not until they had racked up six months of “supposed unpaid payments and hefty fees and fines”. The judge found on my behalf and told them to get rid of the fees and pay court costs. I was warned by my lawyer that they would likely just add the fees to the end of the loan. This will not come before the judge until the very end of my bankruptcy in which case they will foreclose on me as soon as I am out of bankruptcy protection. I have never missed a payment and they say my 8300.00 in debt at the start of bankruptcy in 2005, is now 13,000.00$. My lawyer is suing for my payment history. Has asked twice but they have not responded. (RESPA violation). He says we will likely win but it’s still a risk to go to court with these big companies. My lawyer said the fees are the problem. They can charge fees all they want to. His fear is that they will translate the cost of the loan entirely into fees. The history of my payments will make a good case to the judge, however, there is no “sure thing” here.
I am not your average “client” and my lawyer has noted this. I can’t imagine how many folks just sheepishly went away when the fees were being racked up and lost their homes.
I would bet that they are TILA and RESPA violations, along with accounting “errors” or down right fraud in virtually all of these sub prime loans. Their are thousands of reports on the internet of the same exact themes.
Sounds like a great (tragic) diary you could post.
So, a bankruptcy could be it’s own little Truth Commission. Funny.
OT
OMG, SCOTUS ruled against Wyeth & in favor of Levine, in a 6-3 ruling!!!!! I NEVER expected that outcome.
How might that affect the pending Wyeth-Pfizer deal? I’m guessing Pfizer gets what amounts to a discount on the transaction…sort of a subsequent events type thing? Someone will ultimately end up paying, and I’m guessing it won’t be Wyeth or Pfizer. So who takes the beating? The employees, of course. There are already some heads rolling inside both corps. That trend will probably just be accelerated…
Here’s the FDL post on the subject.
openleft has a post up worth reading on this topic. They think Conyers bill will pass tomorrow.
And a link to a petition on this subject as well.
http://fightingforourhomes.com/
i wish we were calling for across the board cramdowns (both hugh and roubini are calling for it).
the bankruptcy provisions should have been made, if not before, certainly last fall as the price of passing the TARP legislation. too little too late now.
I agree that the two sets of amendments were inspired by the banking industry. I am less sure that these amendments are as damaging as some suggest in terms of keeping people in their homes.
I still think the perils of foreclosure give the mortgagors a strong bargaining position.
One other thing, if there aren’t a high pecentage of non-bankruptcy workouts, I wonder if the bankruptcy system as currently constituted could handle this.
I am certain the bankruptcy system can handle the work. See my earlier diary. The short version is that we in the system are really good at negotiating to keep costs under control.
Pork post upstairs ——->
Selise I meant the last reply to go to synoia.