Pity the Mogul Horde

What a heartwarming debate on the floor of the House of Representatives occurred this morning. The amount of concern for the property banks might lose, and the misfortunes possible for banks that made bad loans, was touching.

Representatives pled with their Democratic colleagues to show their regard for the threatened lenders by insuring that homeowners didn't profit from rational behavior which would allow the courts to consider the values they have lost in ruling on mortgage repayment plans. The so-called 'cramdown' provision would take into account the actual value at issue and ability to pay, represented in the borrowers' plans. That would mean the bank has to take a share in the losses brought on by reckless lending.

The Helping Families Save their Homes in Bankruptcy Act of 2009 passed out of a U.S. House of Representatives committee on Feb. 24; it now heads to the full House for consideration.

Among other things, the bill would allow bankruptcy judges to order banks to reduce mortgage principal amounts or restructure terms — a practice known as “cramdowns” — for homeowners that file for Chapter 13 bankruptcy protection. President Barack Obama expressed support for the plan when he signed a $75 billion foreclosure relief package in Arizona on Feb. 18.

But opponents say it could lead to higher mortgage rates, as lenders will charge more to protect themselves in case of default. About 350,000 additional U.S. households likely would file for Chapter 13 in the 10 years after the measure become law, according to estimates published Feb. 23 by the Congressional Budget Office (CBO). Even without the change, the CBO expects Chapter 13 filings to rise 13 percent this year, to nearly 400,000.

In some ways, the cramdown proposal is similar to what’s allowable under Chapter 12, a provision in the bankruptcy code that was created in 1986 to help family farmers. Back then, farmers who had used high-priced land as loan collateral during the 1970s risked losing their farms when exports and farmland prices suddenly dropped in the ’80s.

Chapter 12 “allowed basically this cramdown idea on real estate, where essentially what a debtor could do was file at the bottom of the recessionary cycle, and have the debtor’s farm valued at whatever the current value was regardless of what the mortgage amount was,” said Jim Burghardt, a Denver, Colo.-based attorney who represented agricultural banks at the time. “The court would split the mortgage debt between secured — i.e. the current value of the ground — and unsecured claims for the remainder of the debt. Then the debtor could restructure the mortgage around the secured amount. So if you’re the lender, you get a reduction in the value of your collateral and a reamortization of the debt. Usually in these kinds of bankruptcies, the unsecured creditors are getting pennies on the dollar.”

The practical result of the change was that banks worked harder than ever to keep their farmer clients out of bankruptcy, Burghardt said.

What a novel idea, that lenders might want to make sure that the entities/people taking out loans could repay them! How very quaint.

Of course, regulation that required lenders to make reasonable loans, assuring themselves of the ability to repay the loan, might have been a much more loving approach by the wingers who now want to let the lenders off the hook entirely. Actual supervision would have kept the whole mess from happening in the first place. Being ignored along with the traditional actuarial tables on affordability is the bonus being paid agents to place more expensive, less sustainable, loans.

It is not the place of our government to insure profit for the irresponsible, but that is the role your wingers are playing out. This is an instance of lenders lobbying against the natural behavior of the market - culling out those that are incompetent or just too greedy. It's past time for the bankers' lobbies to be reined in.

All of the losses should not be suffered by those who received mortgages that lacked justification, at the hands of those that made the loans. Cramming down the homeowner is the worst solution to the problems reckless mortgagors have inflicted on us all.