I'm so sick of the crap about how you'll never be able to get a home loan again if bankruptcy courts are allowed to cramdown mortgages. That's just HBA and MBA fearmongering to protect their special little provision. Try and get a home mortgage today...you'll walk on water first. The homeowner and the mortgage holder each need a slice of this pie...so...allow the court to deal with the mortgage...why...well to those who can't figure it out...the homeowner has almost no leverage with the mortgage company other than to walk away and file a C7, so the mortgage holder looses anyway...duh. Second, predatory lending practices put this wheel in motion in the first place. So, both parties are at fault. But wait...the self righteous are screaming...wah..wah...wah...you can't reward those stupid homeowners...and I reply...why not...we're rewarding the stupid greedy banks. They got $350 billion from the tax payer and did they lend it to help the economy???...hell no. They bought other banks and put the rest under their mattresses. So...let the court reduce the loan to 90% of CMV and when the market recovers, the mortgage company and the homeowner split the recovery amount. The answer is simple and it needs to stay that way. Also, outlaw variable rate 1st mortgages on primary residences and cap the rate at 5%. You want to speculate, do it with some other kind of instrument, not a 1st home mortgage. The greed in this country is astounding and the Madoffs of the mortgage industry need a little taste of jurisprudence! JUST DO IT!

Modifying bankruptcy law is not the answer.

The "cramdown" or any relief of debt by any entity, whether its the bank voluntarily or the bankruptcy court triggers a phantom income gain taxable event to the taxpayer resulting in an untaxed capital gain that now creates an IRS problem for the taxpayer.

Modifying accounting rules with how a bank values its assets is part of the answer. Currently auditors are forced to mark to market the real estate holdings of a bank. This creates losses such that reserves for loan losses must be set aside, even for performing assets. This sets into motion a downward spiral of book assets, stops banks from booking additional real estate loans,and further deteriorates neighborhood value.

Real Estate is a long term asset and must be treated as such by setting up a differing valuation system for those assets the investors are holding. As an example, if I am an investor on a 100,000 mortgage note that had a payment of 700 per month, and I can choose to hold that note through a bad time but only get 350 a month for it, then it becomes a yield issue not a principal issue. I can add that 350 a month to the return on my other investments and I have a blended yield on all my assets, still making a profit just less of a profit. Currently, the banks are not set up to hold those notes as the mark to market rules require a set aside of profits and create losses for the financial institution.

As banks take ownership of the properties, they force liquidate them into a marketplace where there is less lending or willing purchasers and values go down in the surrounding neighborhood and then cause the banks phantom losses on performing assets they hold.

And 25% devaluation is the tip of the iceberg. Start at 65% of original loan balance to be realistic, and look for it to go deeper.

This happened in recent history in Houston from 1985 until 1992 and resulted in abyssmal devaluation of real estate, with the result being the failure of every major bank in the city, years of little to no lending and a long drawn out recovery of the local economy.

What makes bankruptcy the best option for you? Lenders and servicers say they want to prevent foreclosures. Knowing that bankruptcy is an option for you, have they tried to modify your loan and avoid the court process?

The simple answer to your questions is "yes". People will run to the courthouse to lower their mortgage to the home's fair market value. It is simply in their best interest to do so. (this is a general statement, of course).

Take an example - me. I'm filing within the next two weeks. In California, I can have my second note holder's debt declared unsecured, because the value of the home is lower than the debt from the first mortgage. I'll propose paying nothing to unsecured creditors. If the court approves it, bye bye second mortgage. Now if the new law is passed, I can cramdown the first to the value of the home; but for now the law provides the first is "secured" so there can be no cramdown on the first.

Also, if the law does change to allow cramdowns on first mortgages, that doesn't mean the court will be able to re-write mortgages. There are constitutional concerns about giving the court authority to re-write contracts. I suspect that would be unconstitutional, especially given a somewhat conservative U.S. Supreme Court at this time. Still, cramdowns have been upheld on various assets for years. With a cramdown the court is just determining what is and is not "secured" debt.

Is this really going to hurt the system? no, not really. The damage is already done. Again, me as and example, if my Bankruptcy plan is not approved, we just let the bank come get the house. They get what they can get on the market (the fair market value). So, they can take a cramdown through the court and save the transactional costs or they can foreclose. Either way, they get fair market value.

Again, the damage is already done. The banks are going to raise rates no matter what. Or, they will just stop making loans like the one they made to me - $540,000 loan, 100% financed, no asset check, no income check. Call me irresponsible if you want, but just be sure to give some blame to the corporate decision makers on the loan as well. Also, keep in mind where we were at the time - house prices had quadrupled in just five years, everyone was affraid they would be priced right out of the market. In a frenzy, people jumped in, paying way too much for their homes. But they were also told - don't worry about this ARM or this ridiculous rate, we will get you refinanced next year. So, people were jumping in, way over their heads.

Then, the market turned and kept going in the opposite direction. Now, everyone is trying to survive the best they can, including the banks. Were it not for the bailouts, they would all be filing bankruptcy as well. Why would they do that? to get relief from their creditors. It's ok; it's in the constitution. But the system for them (which our federal government obviously prefers) is the bailout system. Fine, they get their bailout. The homeowners get their cramdowns.

So, what about other homeowners who don't get to take advantage? you say that's unfair to them. Yep; it is! Sorry. They will have to look for some other government handout. Maybe they have a job that gets federal taxpayer funding. Maybe they were poor once and got food stamps or welfare, maybe they work for a bank that gets some bailout money, or maybe they just get to live in this great country and otherwise get screwed by those who take the handouts. It's not fair; but it's a good system overall.

DT

No matter what someone is out the money, the homeowner, bank or fed. There is no solution to avoid a loss, only to try and keep people in their homes.

The loan-to-value ratio will eventually decrease by virtue of paydown of the loan and appreciation in the value of the home. I'd expect that lenders would be more willing to live with a higher ratio for a period of time rather than writing down a loan. Besides, if you're drowning, it doesn't much matter whether it's in 15ft of water or 20ft.

It's obvious what's wrong with that picture; it's totally unfair. That said, the question becomes whether you think keeping your neighbor out of foreclosure will put a floor under your upside down misery and make it possible for a turn around. If so, that would help not just housing, but the broader economy as well - perhaps making it more likely you can stay gainfully employed and in your home.

So you and I bought houses next to each other, we both paid $300,000 and we both financed them 100%. Now both of them are worth $250,000. We both work at the same place and earn the same amount. I continue to drive my old car to work but you buy a new SUV. I pay cash for my gas and groceries while you use one of your multiple credit cards. I struggle but somehow manage to make my mortgage payments on time. You can't because you have to make car payments and credit card payments. Your loan goes in default and you file for bankruptcy. Your loan is reduced to $250,000 while mine, because of monthly principal payments is now $290,000. The market turns somewhat and we both sell at the same time for $275,000. You make $25,000 and I have to come out of pocket with $15,000.

What's wrong with this picture?

In the rate buydown example, the obvious trouble with adding to the principal balance is just that, increasing the loan-to-value ratio in a declining or undervalued market, furthering the borrower's underwater-ness.

Some of the loan workouts that have been done do lower interest rates, problem is with borrowers who still can't afford the mortgage.
It's my understanding that once the cramdown is done, the lender takes the loss, just as they would with a foreclosure. If the borrower makes the payments on the adjusted loan amount and whatever other payments the bankruptcy court requires for three to five years (different jurisdictions have different rules) - then, yes, the homeowner would get to keep the appreciation after that.

You would expect that most people would use bankruptcy only as a last resort. But if we're still supporting the notion that most of the people who got caught up in sub-prime mortgages didn't know what they were getting into, and were duped by unscrupulous mortgage brokers, wait until the bankruptcy attorneys hop on. TV will be bombarded with ads for low cost bankruptcy filings. People will call and I seriously doubt a bankruptcy attorney will tell them "don't do it." It seems that with every move there's someone ready to pounce and take advantage of people and the situation.

Has there been serious consideration given to an interest buy-down? Take this for example---

Assume an individual facing foreclosure started with a $300,000, 4.5% loan with a 30 year amortization. The P&I was ~$1,520/mo. Let's assume they were able to afford that.

Now their rate adjusts to 7%. P&I becomes ~$2,000. They can't afford the extra $480 and their house goes to foreclosure.

What if the lender allowed the individual to buy-down the interest rate back to 4.5%, charged them a point to do it and added that point to the loan value making it $330,000? The P&I on $330,000 at 4.5% with a 30 year amortization is $1,670, or only $150/mo. more than they were paying when they could afford it. Assuming the increase in the mortgage payment is the only credit issue this borrower has this keeps them out of bankruptcy court, allows them to keep their house and keeps the loan on the books.

I also have a question on a Cramdown. If a judge lowers the loan value to coincide with the house's value, what happens when the market turns and the house is worth more than the re-structured loan value? Does the homeowner get to sell the house and pocket the difference?