Skip to comments.Robbing the bank: Congress has its way with financial institutions
Posted on 08/02/2009 8:30:55 PM PDT by JohnRLott
Some risks don't pay off. The time comes when the right thing to do is to let a bad investment sink. This is more responsible than continuing to throw good money after bad to keep unwise ventures afloat. For the housing market to turn around, bad mortgages must be allowed to sink -- but Congress has other plans.
Rep. Barney Frank, Massachusetts Democrat, is threatening to revive legislation that would let bankruptcy judges rewrite mortgage contracts if banks don't "voluntarily" write off a larger percentage of bad home loans. The policy ideas of the savvy chairman of the House Financial Services Committee should be taken seriously.
Mr. Frank was among the politicians who pushed for changes in underwriting standards over the past decade. Those new rules involved eliminating verification of income or assets and virtually eliminating down payments to get a house. Those modifications greatly contributed to the current financial crisis. There was a seemingly noble goal in loosening lending standards to increase homeownership among poor and minority Americans, but the changes created a time bomb that was set off as soon as property values began to decline. . . . .
(Excerpt) Read more at washingtontimes.com ...
How long did it take for someone to figure this out since 1913?GEEZ!GIVE ME A BREAK!
Bawney Fwank’s intent may signal a belief among Dimocratz that they expect The Messiah to be a one term and out Messiah. If that’s the case, Bawney may be “setting a bomb” for the new Republican President, i.e., another banking crisis created by a housing collapse. Could he be convicted and sentenced to life imprisonment for his actions? Or, perhaps Ted Kennedy still has enough life in him to take Bawney for a ride across a river, any river without barriers would do.
Read the whole thing, but a key section is appended. The point is that, for every type of secured loan EXCEPT mortgages on principal residence, cramdowns are ALREADY allowable in bankruptcy proceedings. This posting discusses the background of the argument over the exception for such loans.
Here’s the issue, in a nutshell. Until the 2005 bankruptcy reform, insolvent homeowners could choose Chapter 7 (liquidation) or Chapter 13 (repayment plan) bankruptcy. After the reform bill, for practical purposes most homeowners are limited to Chapter 13.
Chapter 7 filings usually do not result in borrowers keeping their homes, although they can (if the borrower reaffirms the mortgage debt, the court accepts the reaffirmation, and the borrower has the financial capacity to continue to make mortgage payments). In most cases, the BK stay is lifted and the loan is foreclosed.
You can think of Chapter 13 as itself a kind of loan modification: the court establishes a 3-5 year repayment plan for all the borrower’s debts, with the unpaid remainder discharged at the end of the repayment plan period. In Chapter 13, the debtor can keep a mortgaged home, as long as he continues to make mortgage payments throughout the plan period, and makes up any past-due amounts (including fees) during the repayment period as determined by the repayment plan. If the borrower does not or cannot continue to pay the mortgage, the stay is lifted and the lender can foreclose.
However, secured debts can be restructured or modified in a Chapter 13 bankruptcy, and secured creditors, except the mortgage lender on a principal residence, can be subject to what is called a “cram down.” This happens when the amount of the debt is greater than the value of the collateral securing it; the court reduces the value of the secured debt to the market value of the collateral, with the remainder being treated as unsecured (and subject to the same repayment plan/discharge terms as any other unsecured debt). The prohibition of court-ordered modifications for mortgages on principal residences was created in 1978; between 1978 and 1993 most bankruptcy courts interpreted the law to mean that while interest-rate reduction or term-extension modifications were not allowed, home mortgages could still be crammed down.
In 1993, with Nobleman v. American Savings Bank, the Supreme Court held that the prohibition on modifications of principal-residence mortgage loans also included cram downs. The result is that borrowers who are upside down and who have toxic, high-rate mortgages are simply, in practical terms, unable to maintain their homes in Chapter 13.