Froggy went a-courtin’ (CRAMDOWN)

Last week the centrist Democrats, at the behest of their banker overlords, postponed a vote on a House bill that seeks to stem the ever-increasing rate of home foreclosures.  Among other things, the bill includes a “cramdown” provision that would allow people to renegotiate the terms of their primary mortgage.  That legislation is supposed to be re-visited today; it remains to be seen how they will attempt to water it down.

Needless to say, the financial geniuses at the lending institutions who approved these crappy loans are opposed to having their crappy investments devalued in bankruptcy court. They’d actually prefer to have these loans go unpaid and keep their inflated values on the books than to put the homeowner back into a position where they can continue to make payments.  In other words, they’d rather force people out of their homes than take a hit to their bottom line.  

Much like Willy Wonka’s squirrels, this foreclosure bill separates the “good” nuts from the “bad” nuts as far as Democrats are concerned.  Not to go all Nader on you, but the monied interests are just as cozy with the Dems as they are with the Repugs.  The only difference is the Democrats have an activist base that attempts to hold these swine accountable.  Jane Hamsher writes

[Head of the New Democrat Coalition, Rep. Ellen] Tauscher’s office also said she hasn’t met with any bankers or lobbyists on the matter, and that may well be true. She doesn’t have to. Adam Pase, the executive director of the New Democrat Coalition which Tauscher chairs, works directly out of her office.

Pase is a former lobbyist for the Twenty First Century Group, whose client, the Coalition for Fair & Affordable Lending, is an astroturf group, financed by the banking industry, that lobbied on behalf of. . . you guessed it. . . sub-prime lenders. Contrary to what you might hear on Morning Joe, it was national civil rights leaders who joined together tofight the Coalition’s predatory lenders as they tried to pass the Ney-Kanjorski bill, which would have enabled banks to get around predatory lending laws and make more bad loans. This they justified based on the oh-so-high-minded need to provide loans to low income and minority borrowers. It was true scumbaggery.

I’m very interested to see where this goes today.

Some quick notes:

  • The “cramdown” provision only applies to the mortgage of a primary residence… Why?  Because “people with vacation homes and investment properties, including flippers, can already go to bankruptcy court and have their loan terms modified.”  Ya got that?  It’s only the poor schmo who’s only got one house to lose that’s left squirming on the hook.
  • I’m sure I read somewhere that, if and when the value of the home goes back up, the bank could seek to recoup the original amount of the investment upon sale of the home.  (Or maybe I’m just mis-remembering the line of bull they feed us every time the Fed proposes we purchase Wall Street’s toxic assets at inflated prices.)
  • Up until 1993, the cramdown provision was law.  Not only did it help the homeowner in distress, but it also provided a (now obvious) check on unrestrained lending by banking institutions who had to fear writedowns on their investment if they made ill-advised loans.  Think that could have helped our present situation?  (See this excellent discussion of the importance of cramdown legislation over at Calculated Risk… in 2007, back before Congress killed it the last time… thanks, assholes!)…
In fact, I have some sympathy with the view that mortgage lenders “perform a valuable social service through their loans.” That’s why, when they stop doing that and become predators, equity strippers, and bubble-blowers instead of valuable social service providers, I like seeing BK judges slap them around. Everybody talks a lot about moral hazard, and the reality is that you’re a lot less likely to put a borrower with a weak credit history, whose income you did not verify and whose debt ratios are absurd, into a 100% financed home purchase loan on terms that are “affordable” only for a year or two, if you face having that loan restructured in Chapter 13. If you are aware that your mortgage loan can be crammed down, I’m here to tell you that you will certainly not “forget” to model negative HPA in your ratings models, and will probably pay more than a few seconds’ attention to your appraisals. You might even decide that, if a loan does get into trouble, you’re better off working it out yourself, via forbearance or modification or short sale, rather than hanging tough and letting the BK judge tell you what you’ll accept. That would be a major bummer, right? 

I love the phrase “moral hazard”.  It neatly confers victim status upon the kindly mortgage lender, while forcing the rapacious homeowner, whom it would be “immoral” to help, out into the street.  Nevermind the predatory actions of the lenders, who were an equal (I would say more than equal) party in the failed transactions.  Cramdown seeks to stem foreclosure rates.  With increased foreclosures, the housing market is flooded with realtor-owned houses – and  I guarantee nobody is buying them at their previous loan prices.  So these banks are taking a hit regardless – and they want to drag everyone down with them.

I would suggest that the moral hazard here is indeed heavy on the hazard, though low on morals.  How deep does this hole have to get before we have some responsible action?

Still not convinced about cramdown?  Here’s some more facts, courtesy of Anita Hill (via FireDogLake):

Women borrowers are overrepresented in the subprime lending market…Across the economic spectrum, women receive less favorable terms than similarly situated men on home purchase, refinance, and home improvement loans….

Elderly women are prime targets of refinance and home improvement subprime lenders….Rising property taxes and medical expenses make older women on fixed incomes particularly susceptible to lenders who promise money for necessary repairs, but instead exact huge fees and charge inflated interest rates….

A former loan officer testified about how she marketed subprime mortgages: “If someone appeared uneducated, inarticulate, was a minority, or was particularly old or young, I would try to include all the [additional costs] CitiFinancial offered.”

And lastly, for the heartbreak…

(thanks again to FireDogLake who has been all over this issue)

* * *  UPDATE  * * *

The House continues with suspensions today, apparently delaying consideration of H.R. 1106 at least another day. That gives us another day to contact your Representatives and Senators in support of the bill and in opposition to further weakening amendments. Mortgage modification keeps families in homes, and keeps banks getting paid. Tightening the noose any more just means more homeowners will give up and throw the keys back in the bank’s face — and then the banks will come to the rest of us eventually, anyway, only this time for a bailout check.

  • M.Uila

    P.S. Here is the source of my cryptic post title…

  • lookie lookie

    its a cramdown, cram yourself silly
    its a cramdown….do you want a loan?

    I really like that sweet old lady, its kind of positive clip in a way that she got over her shame to ask for food.

  • M.Uila

    Yank your crank, if your bank-a
    Is goin’ in the tank-a
    Smoke that reef for relief-a
    If you’re goin’ broke!

    Better dispose of your composure
    Your house is in foreclosure!
    You know the judge he won’t begrudge ya
    If you need a smoke!

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