The comment says that the proposed law would allow the bankruptcy judge to reset the mortgage “terms.”  I’m not sure this is a good idea.  It may also be unconstitutional under the impairment of contracts clause.

In a traditional bankruptcy “cramdown,” the debtor has (for example) $500,000 after the costs of bankruptcy, but owes $1.0 million.  The “cramdown” occurs when the bankruptcy trustee twists some creditor’s arms to convince them to take 50 cents on the dollar of what is owed; the $500,000 is distributed, the debtor is discharged.

What’s being discussed is not at all the typical cramdown.  In secured transactions, the bank really owns the house.  The loan is “secured” by the home, and the bank can take the home in satisfaction of the debt. 

Let’s look at the two likely scenarios.  First, somebody was conned into buying a $500,000 home with funny-money loans, and cannot afford to pay a normal 30-year fixed mortgage in that amount.  In addition, the house is now only worth $350,000, so the homebuyer cannot even sell the house and pay off the debt.  In that situation, the homebuyer cannot afford the home, cannot afford the loan, and should walk away, arrange a deed in lieu.  What is the point of renegotiating if the loan is completely beyond the homebuyer’s reach? 

Second, somebody lost their job, and they can’t afford much of anything.  What type of re-writing of terms can be done for somebody whose family income has dropped in half?  Can anyone assume the income will come back to prior levels?  No.  Again, the homebuyer should just leave.

Bankruptcy judges tend to be very conservative.  I see no reason to believe they would intervene to help the defaulting homeowners.  They would be more likely to re-write the terms so that the interest rate goes up, penalties are attached, the 30-year becomes a 60-year, and the homeowners end up paying 20 times what the house is worth, except the homeowners don’t understand that.  They don’t understand just like they don’t understand that they do not “own” their homes—often not even one penny’s worth of ownership.  The bank owns the house.  They are nothing more than renters who pay the taxes and utilities.

The better result for homeowners would be for them to walk away, deed the property back to the lender, have the federal government agree that they will not be liable on any deficiency (if the house is worth less than the loan) and will not be taxed on any loan forgiveness.  Walk away, go rent, save their money, get stabile, then a few years down the road see if they can afford to buy. 

We should stop playing the banker’s game.  The banks fooled the public into believing that being a home-owner is the one source of security in life.  Buy a home, it will increase in value, you can take money out of it.  Like winnning the lottery.  People have been fooled into buying homes when they cannot afford to do so.  Now is as a good a time as any to educate them about the sad facts.

In addition, let the bank take back the property.  They will re-sell it at the current value of $350,000.  The value of property was artificially blown up by Greenspan, and now it needs to settle down.  Way down.

More great news!  The so called “cram down” is nothing more than forcing the greedy bankers to reduce the interest rate on their loans to a manageable level.  The bankruptcy judge can set those rates and adjust the loan values and that is what we should have been doing all along.  These short sighted Republicans seem to believe that throwing families out of their homes is cost effective.  For their information, it costs more to support a family in HUD housing and motels than it would cost to have lowered their mortgage in the first place.  That’s the Republicans for you, always pennywise and pound foolish.  A 90 day mentality with no thought of long term consequences.  I hope that this cram down can happen soon, for all of our sakes.