As I mentioned last week (story here), it looks as though cram-down legislation could be coming down the pike. The Wall Street Journal, citing people close to the situation, is reporting that Citigroup (along with other lenders) and lawmakers are discussing legislation that would allow judges to modify loans for millions of mortgage holders who end up in bankruptcy.
UPDATE (January 9, 2009): Plan to Cut Foreclosure Rate Clears Key Hurdle (Citigroup will not oppose legislation). Read story here (link).
From the Journal (January 8):"The question that faces us now is this: After committing over one trillion dollars in taxpayer money to address the financial crisis, why don't we take a step that would indisputably reduce foreclosures and that would cost taxpayers nothing?" Sen. Durbin said in a statement introducing the legislation.
A measure allowing court-ordered mortgage workouts could be passed separately, or as part of Congress's coming economic-stimulus package. Senate negotiators say Citigroup's endorsement of the measure is important for bringing other big lenders on board quickly, improving the measure's chance of passing with the stimulus bill.
"We think it would be great to put this on the stimulus, and the bank support will make it all the easier to accomplish that," said Sen. Charles Schumer (D., N.Y.), who, as one of Citigroup's home-state senators and key player on the Senate Banking Committe, is brokering the talks.
I don't like ripping up privately-negotiated contracts, so I am against judicial cramdowns. Would have loved to see lenders and borrowers work this out on their own but for whatever reason it looks as though that just isn't happening fast enough.
You can read the rest of the story here (link).
Related Articles:
Friday, January 9, 2009
Citigroup, Senators in Talks to Let Judges Modify Mortgages (UPDATE 1)
Subscribe to:
Post Comments (Atom)
BY EMAIL 
RSS 
48 comments:
I really like riping contracts with greedy banks.That's awesome and amazing thing for consumers to see ,how greedy banks beiing punished.Judicial cramdowns is one of the positive sides of credit crunch.
As a general rule, I don't like ripping up contracts.
But, having said that, I can live with the end result. Consumers, strapped to the gills, will (hopefully) be able to stay in their homes after bankruptcy. The loans will be rewritten and people will be given a fresh start.
Fact of the matter is that modifications of late have not been working. That's because, in many cases, payments have not been reduced -- or not been reduced enough.
So, Anon, I understand your sentiments.
But do remember that when things were going well, and people were making 20% a year, no one was clamoring for a rewrite.
Judges can already wipe out second mortgages. Until there are no homes for rent I don't see the big emergency for rewriting people's 1st mortgage. There is a remedy in the private contract already for non-payment. You give back the collateral and find another place to live. Talk about extending the credit crisis. Bankruptsy filings are going to skyrocket and if it hasnt already credit availability is going to come to a screeching halt.
Sam, bankruptcies are already on the upswing. 2008 had the highest number of BKs since, no surprise, 2005.
http://www.creditslips.org/creditslips/2009/01/bankruptcy-filings-rise-32-in-2008.html
CM,I understand ,that you don't like ripping contracts.But please do not forget about OURS,TAXPAYERS MONEY,that have been used to bail out shamefull greedy banks.So,I think we,cosumers,should have something in return.That's why judicial cramdowns are so sweet,amazing and awesome news to everybody.And those 20% of appreciation,you are talking about was long time before OUR,TAXPAYERS MONEY was used to help greedy financial institutions.
Behavior rewarded is behavior repeated.
So we want to reward the people who are/were too stupid to realize they can't afford a $300,000 home on a $20,000 a year salary by forcing the lender to change the amount due to match what the person can afford to pay.
On the other hand, people like myself and Mrs. FLT, those who purchased a house they could afford, will see no reduction in principle or interest.
It seems to me that the smartest thing I could do would be go out today and get a HELOC for every penny possible, then completely quit paying anybody anything I owe.
The only way this cram down thing should work is if people benefiting from a cram down are not allowed to make a profit when it comes time to sell their home. Even if the amount crammed is repaid without interest 20 years down the road when the homeowner sells.
In other words - if a judge orders the bank to reduce my $300,000 principle by $50,000, and I sell my house in 2020 for $400,000, the bank should get $50,000 of the sale.
Anon, I imagine that you don't like ripping up contracts either. I doubt that you're saying that. But, as I said earlier, I do understand your point. And I understand the good that can come out of the process.
As to your last comment, greedy individuals were using cash from those greedy financial institutions to enrich themselves as well. It's not a one-way street here.
You're looking at the very recent past to excuse the cramdown process. I'm simply taking a longer view on the topic.
Sam makes a good point, by the way. Why not turn the collateral in and rent instead? That way the borrower is not left homeless. Right? Or no?
FLT, I argued that on my exam. If cram downs are allowed, there should be a mechanism by which the borrower doesn't get a windfall if -- and when -- home prices rise above the cram down.
There would obviously be details that need to be worked out, but something could be done.
Foreclosure suspensions extended through January
http://www.msnbc.msn.com/id/28559432/
CM,what do you think,if all huge bailout money ammount,that have been spend to help greedy banks,AIG,GM,Chrysler would used to pay in equal pieces to pay each home mortgage owner?....People would have a lot of money...spending would increase dramaticaly
Anon, I have said that before. Rather than giving all this cash to the banks -- to bail them out -- why not just hand me a check for $25K? Works for me!
I imagine that we could stimulate the economy just fine.
Anon, I suspect that you and I are not that far apart. I was being nitpicky about the contracts. But that doesn't mean you and I disagree about everything. I'd just like to find another solution. A free-market solution is always my first choice. If that doesn't work, then we go from there.
CM,how do you like this ''businessman''?
From Yahoo.com.."NEW YORK – Prosecutors said Thursday that investigators found 100 signed checks worth $173 million in Bernard Madoff's office desk that he was ready to send out to his closest family and friends at the time of his arrest last month.
The detail was provided in a court filing Thursday as prosecutors argued that Madoff should have his bail revoked and be sent to jail. They said the checks were further evidence that he wants to keep his assets away from burned investors.
In the filing, Assistant U.S. Attorney Marc Litt said Madoff cannot be trusted because he had long engaged in a "scheme that required the defendant to lie routinely to thousands of people and a scheme which has caused extraordinary damage to individuals, families, and institutions all over the world."
The judge will now decide whether Madoff should be sent to jail or remain free on bail in his luxury Upper East Side penthouse."
Anon, the guy is a f'ing crook. Period. I can't even call him a business man. He's a thief.
Does it bother anyone else that these articles never mention what options for "restructuring" will be made available to judges should this legislation pass? They always talk about 'cramdowns' and 'restructuring' in this sense that strongly suggests that rewriting of the principal will be permitted, which of course they don't want to come out and say because public sentiment would not be on their side if that was the case. Is it really so hard to start with just rewriting the interest rate and loan length? The goal it seems to me should be two part, stabilize the economy and keep people in their homes.
There are two parties that need to bear this burden, the owners that got themselves into mortgages they should have known they couldn't afford, and the lenders who gave them those mortgages. Who cares if the homes are 'underwater', if you wait long enough eventually the value will go back up and it won't be under water anymore. You may have to wait a long time but too bad. Rewrite the interest rate and loan length so that the bank receives approximately the same net value, ie. rewrite a 9% 30 fixed into a 6% 45 fixed. This shouldn't be as difficult to figure out as everyone is trying to make it.
Anon, I am with you. Thanks for that comment. I have nothing more to add to your post.
I'm with you about contracts, for the most part, but I do like this idea. Banks got greedy, and they sold mortgages they knew damn well they shouldn't be selling, caring not one single bit that they were taking advantage of people, misrepresenting the products they were selling, and even committing fraud. I think giving judges the authority, on a case by case basis, to do cram downs in those circumstances is great.
Caughtshort, one of my very good friends is a litigator. He goes after mortgage companies that did deals that were riddled with illegalities. TILA violations. So, I am with you. But there are remedies for poorly-constructed contracts that were not drafted correctly.
Citigroup Reaches Deal With Lawmakers on Home Loans
http://www.washingtonpost.com/wp-dyn/content/article/2009/01/08/AR2009010802368.html?hpid=topnews
I suspect doing a minor "rip-up" of a mortgage contract to modify rate/term may prevent the ultimate rip up- a bankruptcy discharge of the entire mortgage.
I don't believe these new powers are intended for actual use as much as they are for enforcement. Certain lenders have been doing "modifications" that leave the consumer worse off, accelerating default instead of preventing it. Knowing that if they don't put a reasonable modification in place a judge will- may serve as incentive to get these lenders to create workable plans.
\The problem with assets getting to far underwater is that it isn't illegal to walk away from the debt. It's why you can't borrow $100,000 on a $20,000 car. The remedy won't be found in morally guilting people to ride it out when they are 200k upside down.
I was thinking of a solution the other day and I wonder what you guys think. Allow home owners to write down their mortgage to Fair Market Value with the following terms.
1) You can't sell for 5 years (reduces supply and forebades windfalls). If you must sell (divorce, job transfer, ect.)you must prove it, you can receive no profit from the sale, and will owe taxes for the old forgiven debt, and will suffer a foreclosure on your credit. In other words you better really want to keep your house.
2) You must pay all back IRS taxes and property taxes
3) You must pay triple your state and city property taxes for 5 years. (This will shore up state governments financial problems.)
This is a very crude rough draft but I hope you get the idea. We will never be in a healthy lending environment until people owe relatively close to what their home is worth. All other rescue plans will fall short.
Rad, have you ever posted here before? Of the thousands of comments made on my blog, I don't believe I have ever seen your screen name. If I am correct, welcome aboard!
You are absolutely correct about these current mods not working. I have mentioned that previously (somewhere else on the site). That's why these banks need to do a better job of modifying the terms. One of my other readers had a good solution. Start by reducing rates and lengthening terms. See if that works. If it doesn't, we go from there.
But just slashing prices to current market value -- with no strings attached -- doesn't work for me. I know there is a happy medium somewhere, and I am sure I could get behind something that was "fair." Or more fair.
Rad, just one last comment: Wells Fargo sucks! (Inside joke for those wondering.)
Sam, I like your thinking. Not sure what the details would look like, but I am behind you. Find something that appeals to more people (those affected and those unaffected) and I am sure people like me wouldn't have trouble jumping on the bandwagon.
We don't know what the final legislation will look like. It wouldn't surprise me if there were some limitations placed on those who get these workouts.
This is pretty serious business-I am not sure I agree with it.
I have not read all the comments here, but just a few years ago-these same homeowners were netting double digit gains in appreciation and its not like the banks were asking for a piece of that action.
My Charlemagne in life is-Be careful what you ask for...
These cramdowns may have the opposite effect of that desired-I can see situations where these will cause the price of housing to continue to remain depressed. If your neighbor, who lives in the same/similar house, suddenly has his mortgage balance reduced by $100,000, what does that do to the value of yours?
A question no one seems to be asking.
Maybe housing prices aren't depressed. Maybe they are where they should be. Maybe we are trying to prop back up a value on homes that never made sense. Heck by the way I value a home they are still too high. I rent a home in my neighborhood for about half of what my neighbors pay for their mortgage. I have no property taxes, maintenance, and insurance. The bottom of this housing market might be anywhere since it is driven by supply and demand but for practical terms it should right around when the cost to rent is equal to or greater than the cost of a mortgage payment
Sam,
all those things you don't think you are paying-you are.
Rents are artificially low right now due to the downturn in real estate. Owners are accepting less rent in order to not loose their house.
However, this is not a healthy or sustainable situation. Rents will increase, and when they do, it is a sign that value is increasing again.
Regardless of whether you are a home owner or a renter, falling real estate prices hurt everyone. I believe that double digit increases year over year were a bad thing. I also believe that declining values are equally as harmful.
are the mortgage balances really going to be reduced? or is the life of the loan going to be extended longer & interest rates dropped? I am SO not OK with mortgages just being written down. And I am even more upset at the thought of people being able to do this with no repercussions. Like stated earlier by other posters. I will be watching this closely, but I am hoping it is for the restructuring of the loans, not for the writing down of the balances.
Judges would be able to write down the loans, Rebekah.
If fair market value is $200,000 -- and you have a $500,000 mortgage -- the judge would be able to knock the loan down to $200,000. That would clearly help the homeowner, since that person would be able to more easily afford a $200K house than a $500K house.
But we don't know what the details of this will look like yet. Will be interesting to see how this works in practice.
everyone should check out Tanta's posting about this very thing.
In essence you don't get off 'scott free', you still have to go through a bankrupcy and all that jazz.
Oh, absolutely, Anon. No one is getting off scot-free here. There will still be a bankruptcy. The only thing this does is give the borrower a better chance of staying in the home after the process.
Here is Tanta's posting from 2007. By the way, Tanta has since passed away. She was awesome. RIP, Tanta.
http://www.calculatedriskblog.com/2007/10/just-say-yes-to-cram-downs.html
Enigmafan420,
How do renters pay property taxes, maintenance, and insurance? The rental market for homes was still low at the peak of the real estate market. I rented a so called million dollar home for $3,000 per month. Same home is worth 500k or so now and the rents in the neighborhood are similar. Where are you getting your data? Market rents have little to do with the value of a home. It is supply and demand. I own property in Texas and my renter pays $1050 per month. The house apraises for $100,000 or so. I can rent a $200,000 house in California for the same price.
I guess your point is I pay for it indirectly in a way. But honestly if I worried about all the things I have to pay for indirectly I would go insane. I'm trying to attack the root of the problem and that is how we value homes. If someone isn't willing to pay you enough money monthly to cover the mortgage payment I am simply arguing that you have too big of a mortgage. When banks figure this out they will stop lending so much for houses and we won't have a foreclosure problem.
Anon, thanks for the reference to the Tanta piece. That was an excellent read. She makes some great points. And I like her conclusions.
Good stuff.
By the way, the comments that followed Tanta's story were even better than the story itself. And they just serve to reinforce how complicated this stuff is.
http://www.haloscan.com/comments/calculatedrisk/5155749188154324085/
well, bankruptcy isnt the scarlet letter it used to be. People being able to buy another house, get a car loan, and credit cards within a year (seen it happen first hand) of filing bankruptcy... that is no punishment and is pretty much getting off "scott free". and yes, I am one, maybe one of the few these days, who believes there still should be negative repercussions to filing.
Seriously! This makes me so upset! Does ANYONE feel the need to live up to obligations they make anymore? Where has ethics & honor gone?
I think it is VERY unfair to those who didnt overextend themselves and who can afford their debts to have to pay in taxes to bail out their neighbor who is an idiot and greedy with his money. Yes yes, we all know there are the small exceptions where people had situations beyond their control, where they really are victims, but in MOST cases, the people with wide-eyes, buying the houses they couldnt afford are just as culpable as the greedy lenders who preyed on them.
I see it first hand in my own friends and family. They took the bigger, more expensive house because they wanted it and people told them there was a way to do it. They admit that in the back of their minds, they knew realistically they couldnt afford it, but they had to take advantage while they could.
So, now people like my husband and I, who knew we couldnt afford it, sat back, paid our debts, struggled to get the 20% down and be debt free before we went out and bought a house we knew for a fact we could afford, are now the ones being punished. I cant help but feel cheated by this. It seems so backwards. To reward the greedy or irresponsible and punish the responsible just doesnt sit well.
I have sat here and tried to put my emotions into words and I cant get anything but muddled thoughts. I'm upset by this. I feel cheated and punished for doing it the right way, for being responsible, and for not being stupid. And I am furious that my hard earned tax dollars are going to help people write off, pretty much scott free, debt they incurred themselves.
Rebekah, I have railed -- other places -- about the casino-like environment we had a few years ago.
Many of my friends were buying homes they could not afford. They got limited-time teaser rates that would allow them to afford the house long enough to see 20% gains each year and long enough to refi the house after the penalty period expired. Many of these friends are now underwater. Some have been foreclosed. Others have received loan mods. It was just gambling. And they knew this. They knew what they were getting into. I don't have a lot of sympathy for those folks.
Now, if you didn't understand what you were getting into that's another thing. There were some people out there who were naive. They really did want to participate in the American dream. They were not looking to flip the house within twenty-four months. And, in some cases, they got loan products that they did not understand. Mortgage brokers sold them on no-interest teasers and said they didn't need to worry about it.
As for you, and people similarly situated, it must suck to watch this unfold. You did it the right way. You weren't participating in the casino atmosphere. I doubt that many here would not understand how you feel.
But I will say this: even though you are going to shoulder some of the excess, you still have a great credit history. You still have a sense of meeting your personal obligations. And you remain financially intact.
Many in your cohort cannot say the same thing. So, yes, you lament the fact that others are being bailed out. But, trust me, some of the very people you're irritated with wish they could now trade spots with you.
I know several people who would trade places with you in a heartbeat.
Thanks for your thoughtful comment.
Sam,
if you don't think those items are priced into the rent then you haven't thought the whole thing through.
We had a renter in our "old" house before sale and guess what-Rent was enough to cover payment, taxes, insurance.
Maybe right now in your situation you are renting at far less than those things, but you are still contributing to the owner's ability to maintain the house. And, if/when things return to "normal", expect to pay more of the owners expenses.
You know, I'm not completely heartless. I wouldnt even care, in fact, I'd be happy for the homeowners who are now in a bind, to be able to restructure their loans, if it was actually restructuring. (extending term length, or interest rate, etc to bring the loan payments within a realistic payment for the borrower). It is when you just wipe away a financial obligation that has rippling effects beyond just the contracts org. participants that bothers me.
I know another poster already mentioned this, but I think it is the fact that people are paying the $500K for their home worth $200K, while others are going to walk into court and now get to pay $200K for their home worth $200K and then benefit in the long run by appreciation. BK isnt such a bad thing for $300K in your pocket when you sell, kwim?! It isnt even a bad price to pay for $25K or 50K. It's ALMOST like free money! *wink*
What keeps someone from doing this over and over? and does this REALLY help the problem in the long term? or is it just another one of those short term fixes?
I guess the upside to this is that home lenders MAY (hopefully) start being more selective and very certain that the people who they lend money to in the future, really are people worthy of the loan.
wish I could edit, but I'll just add another post. I just read the link posted above. I agree CM, great post, which I agree alot with, and I too think the comments are even better. Thanks anon and CM for Tanta's link.
I know I don't think you're heartless, Rebekah. You sound frustrated -- but certainly not heartless.
One can only petition for bankruptcy every eight years. So, it's likely they wouldn't be able to do this over and over again. No worries there.
Another thing that will come out of this is that lenders will also be damn sure that they are writing deals that make sense.
I'd advise everyone to read that Tanta story that I linked to earlier in the comments thread. The entire loan is not forgiven. Part of it moves over to the unsecured portion of the debts ledger. In a Chapter 13 it gets prorated -- it's not completely wiped away.
Here's the link again:
http://www.calculatedriskblog.com/2007/10/just-say-yes-to-cram-downs.html
And here are the comments that followed the story:
http://www.haloscan.com/comments/calculatedrisk/5155749188154324085/
I see that Rebekah and I were posting at the same time. Nice. We both had similar thoughts about the Tanta piece.
Far Left Texas you are missing the point of the cramdown. The economy is in danger of total collapse if mortgages keep going the way they're going. Previous plans have failed. As bad as it is we have to incentivise people that did not pay so that the cash keeps coming in for the banks. Otherwise all the taxpayer money in the world won't save them.
Just a few short years ago the conventional wisdom was to buy a house before you were priced out of the market.
Oh- and get the ARM, take the saving from the low initial rate and put it into savings.(nobody did that part, lol)
In 2 years, refinance into a fixed rate product, or sell the house and reap huge profits.
That little bit of wisdom was preached by everyone from lenders to real estate agents to that guy who takes care of uncle Bob's investments.
If you didn't do the above- you were considered an irresponsible financial wierdo.
And to corroborate the above- the plan actually worked for nearly a decade.
Renters were scoffed at for throwing their money in the trashcan.
Now that it's blown up the song has changed.
It's en vogue to blame consumers for taking advice that nearly no one disagreed with at the time.
Now they are financially irresponsible for taking the advice they were formerly irresponsible for not taking!
I try to not be too harsh on those in over their heads, while hindsight is always more accurate- it is also always too late.
Rad, that seems so long ago, eh? Imagine this: putting the money in savings until your ARM was refinanced into a fixed product. I didn't know anyone who was doing that. That's sound advice, though.
Marcus, I came across a quote from Abraham Lincoln today and thought 'no truer words have been spoken'.
"These capitalists generally act harmoniously and in concert, to fleece the people".
Sam, nice quote. Lincoln is describing what would now be an antitrust violation.
Yup! And I just finished reading "The House of Morgan". Very informative and interesting as to how our system came into being.
Nice. A little light reading for the weekend. Maybe you should write a book review for my site. Ha!
haha! I would call it "A must read for everyone who engages in the monetary system".
Exactly.
Post a Comment