A bi-partisan vote in the Senate last week defeated what has come to be known as the Mortgage ‘Cramdown’ Bill, a key component of President Obama’s housing relief program. The bill would have allowed homeowners who had declared personal bankruptcy the right to seek the modification of loan terms in bankruptcy proceedings – and would have given bankruptcy judges, under the conditions of the bill, the right to consider granting these modifications.
Banking lobbyists and their surrogate legislators, as well as a surprising number of free-market fundamentalists argued that the costs of these court modifications would have to be borne by all mortgage holders, thus raising the cost of borrowing for all Americans. As minority leader Mitch McConnell said last week, the vote to defeat the bill “ensures that homeowners who pay their bills and follow the rules won’t see an interest-rate hike at the whim of a bankruptcy judge.”
We believe that homeowners should be given at least the same rights as the banks themselves and all corporations enjoy under US law. When corporations go into bankruptcy, they immediately head to court to restructure and re-amortize loans whose conditions they can no longer meet. Chrysler will certainly be seeking to do just this in its upcoming bankruptcy proceedings. The mortgage industry, however, has a special exemption from the general bankruptcy rules. Homeowners are the only entities in America not allowed to seek any restructuring to secured debts, nor are bankruptcy judges allowed to consider restructuring of mortgage loans.
As far as “the whim of a bankruptcy judge” goes, Rich Leonard, a judge with the U.S. Bankruptcy Court in North Carolina wrote this back in November in the Washington Post:
There is a simple answer to the frequent, hyperbolic assertion that such a process would be abused: Chapter 13 is no walk in the park. It requires public disclosure of every aspect of your life, examinations under oath by a trustee and creditors, allowing creditors to haul you into court on any objection, and relinquishment of control of your financial life for up to five years. If you falter, your case will be dismissed and you will lose the entire benefit of the bankruptcy law, including having your original contract terms reinstated. That is precisely why allowing mortgage modifications is such a good approach. It would elegantly separate those homeowners who desperately need to stay in their homes and have sufficient incomes to make reasonable payments from those investors who bet on lax regulation, easy credit and an appreciating market in buying residential properties. Those in the latter category will have no use for this process, but for the first category, it could be a powerful step back to financial stability.
Let’s not forget that the mortgage industry has been guilty of one of the largest bait-and-switches ever perpetrated on the American people. Predatory mortgage brokers further took advantage of rising home prices to ensure unsophisticated borrowers that “they couldn’t lose” and “could always refinance later”. Deregulation allowed ARM mortgages not to be tied to the prime-rate or any index and in many cases had many Americans paying higher and higher rates at the banks whim.
We believe that while these cases are not cut and dried, they are best handled by the courts. Now, of course, thanks to the Senate, the courts don’t even have the tools they need to decide these cases based on their merits.
