SB 61 Fails

[slam22]

April 30, 2009

The Obama administration lost a bid to add a powerful weapon in its fight against foreclosure Thursday, after the Senate voted down a proposal to allow bankruptcy judges to modify mortgages.

The defeat left many housing advocates questioning the effectiveness of the president's loan modification plan. The so-called cramdown provision, which would have allowed judges to reduce mortgage principal, would have put pressure on servicers to modify loans before borrowers file for bankruptcy.

The financial industry lobbied hard against the bill, arguing that allowing judges to change mortgage contracts would add instability into the market and raise interest rates. Senate Republicans and some moderate Democrats were concerned about the bill's impact and about the growing resentment of homeowners in good standing.

The bill was defeated by a 51-45 vote. The House had passed similar legislation last month.

The vote comes on the day that a new report showed foreclosure starts spiking to a record high in March. Servicers initiated foreclosure proceedings against 290,000 borrowers, according to Hope Now, a coalition of lenders, servicers, investors and housing counselors. That's the highest monthly total since the group began tracking data in mid-2007.

Source:
CNN Money

http://money.cnn.com/2009/04/30/news/economy/cramdown/index.htm?postversion=2009043015

[JRScott]

The problem here is that while he said he supported it Obama didn't fight for it which means in reality he didn't really support it, wanted to pay lip support to make folks think he cared but in the end that's all it was.

[Flamingo]

I don't think anyone really expected this to pass. One of the big issues is mentioned in the article in that folks in good standing on their mortgages would probably revolt unless a similar service was avalable for them and it could hugely increase the number of people filing bankruptcy to take advantage of the situation. If one analyzes the situation, there are major problems/issues. Stripping a vehicle to blue book value in a Chapter 13 is way less than stripping a mortgage.

[spidge]

At least we still have the chapter 13 lien strip available. Even though its tough to complete the 13.

[spidge]

One thing I think would help some is to loosen the 401k rules to allow defaulting on related loans as its your money and it could help one get out of financial trouble without that crutch to.
Just my opinion and yes I understand it would cause a tax liability later.

[momisery]

I think they should have handed out the money to people to pay their loans down so they could afford to keep their homes... some would still be out without a job, but it could have helped.

[Tom_Mi]

What would fix this whole thing is this: Until 2012, Remove the FHA Foreclosure waiting period on any home in a short position, provided the consumer puts up 20% cash (real money...no tricks, family loans, or funds from other loans).

This will allow:
-The market to resettle quickly
-People to get into homes they can afford
- ...with equity they'll work hard to protect
-aggressive savings in a country with a low savings rate.


The banks may not like the loss, but they'll have consumers again. All banking executives need to rent "A Bug's Life" and rediscover the engine that feed them. When you put a scarlet letter "F" (or 7 or 13) on half your customers because of market forces they can't control, you foolishly deny yourself access to their otherwise prudent financial resources.

[JustFileSuit]

An alternative gambit

I would note that the current BK legislation, that does not permit "mortgage cram-down" on a mortgage on a debtor's personal home, does not encompass the case where the property is an investment property and the debtor does not live in it. So here is an interesting gambit: the owner moves out of the "under-water" house, and rents it. The debtor rents or purchases another property. In the subsequent BK filing, the debtor now has an investment rental, which qualifies for mortgage cram-down. Presumably a debtor could even do this within a BK petition with the Court's approval (move to a rental nearer work, for example). Does anyone have any information as to whether this concept has ever prevailed against the inevitable adversary proceeding challenges?

[HHM]

That issue has not been tested that much (because that fact pattern actually doesn't come up that much). Think about, if the person is that financially distressed to even consider it, they cannot get the next place in the first instant. Also, realize, that when you "cram down", you have to pay the value of the cram, INSIDE the plan. So in a chapter 13, if you have a $250,000 house that is now only worth $175,000...guess what, if you attempt to cram, you must pay that $175,000 in 60 months...not very realistic.

However, the issue will turn on state law and how they define primary residence.

[JustFileSuit]

The above analysis is fascinating. But the further question arises - what happens in the (admittedly rare) case of a personal chapter 11 filing?

Within the Ch. 11, the BK Plan proposed for vote to creditors would not include any payment for the mortgage cram-down. If the debtor has enough votes to effectively control the outcome, does the cram-down stick without having the overage become payable as unsecured debt? take the situation where the debtor moves in with extended family (e.g. parents' homestead, the sister, whatever) and now treats the original property as an investment property with a renter - but does it within a CH. 11. Would that gambit work out? Expect bleats of protest from the lender, of course.

Where these cases become tussled is when the "lender" is a late-comer to the Note, and purchased it at a huge discount, and is now attempting to make a speculative windfall gain. I would expect the BK Court might not have much sympathy for such a lender. Your thoughts?

[HHM]

The issue is not paying the "difference". The difference (the deficiency) simply becomes an unsecured debt...I think you are missing the challenge to the scenario, you must pay the "secured portion", or the new value, WITHIN the plan whether it is chapter 13 or 11.

For example, mortgage is $250,000. Current market value of $175,000
So, your plan proposed to cram down the residence TOO $175,000

The catch, in chapter 11 or 13, you now MUST PAY $175,000 within the timeframe of the plan. So in a chapter 13, you have 60 months to pay, IN FULL, the $175,000. Granted, in s chapter 11, you can stretch out the plan longer, but the administrative cost of doing so is too high. Also, this is harder to do than you think, because the bankruptcy trustee objects on the ground that if you really have the income to do this (about $3,100 per month to cram $175,000), that your unsecured creditors should not be disadvantaged by the debtor cramming.

Of course, this all assumes you can overcome the initial objection that the original intent of the mortgage loan was "owner occupied" (or primary residence), it is by no means certain, in all BK districts, that the mere act of moving into a new place suddenly turns the non-primary residence loans. Keep in mind, it is the "loans" that are crammed, not the property. The lenders argument is that the loans had the original intent of being owner occupied, and that the mortgage loans do not lose that status by the mere act of the debtor moving.

[JustFileSuit]

Going a bit further in the train of thought that you (HHM) have developed, it would appear foreseeable that a BK Judge could be persuaded to grant a Motion to convert a primary residence to an investment property. The counter-argument of the latest Lender, that the property Note was predicated on the property being owner-occupied as a primary residence, starts to look a bit bleak when it is a CDO or CMO pool and the underlying documents (the prospectus of the CDO) shows that the purpose of the Pool is to foreclose all the Notes and take the properties as REO and sell them off within three years (as we have seen more and more - but you do have to dig and get the original Prospectus of the lender). this becomes more compelling when the property transfer documents show that the Note was "bought" by the latest "lender" for $10. Amazing how many transfer doucments show $10 (not even $10 "and other valuable consideration.").

Once past that hurdle, then the debtor has the cram-down. The overage goes into the pool of unsecured non-priority debts. BUT the debtor's plan then is to pay these debts at say 6 cents on the dollar (as American did when it bought TWA within the USBC as a 363). If the debtor effectively controls the outcome of the votes on the Plan within Ch 11, because either he has convinced the others or because he owes a ton to family members who are content to roll with the debtor (admittedly a more viable scenario), then in effect the debtor has neatly side-stepped any effective payment on the cram-down unsecured.

I would certainly agree that the Debtor cannot simply move out and rent the property and convert it into a rental investment property without Motion before the Court.

Could I solicit your comments on this maneuver? If the debtor's plan involves re-finance of the Note after 10 years (and if failed, then surrender to the Holder at that time) or pay-out from an anticipated future inheritance, why would the Ch 11 Plan be subject to rejection by the Court?

[HHM]

Your still missing the point, where is the debtor going to get the money to pay the crammed value?
When you cram, you create TWO debts.
1. The unsecured deficiency, difference between the crammed down value and the original laon balane (in my above example, this was $75,000)
2. The crammed down value, the current market value of the asset (in my above example, $175,000).

The chapter 13/11 MUST PAY the Number 2, the crammed down value, IN FULL within the timelimits of the plan. That is impractical part for nearly anyone wanting to try this.

I am not saying you can't do this, all I am saying is that 999 out 1000 times, this is simply not practical (the debtor cannot afford it) or, in many cases, legally feasible, if the debtor can afford it, then he is going to run into objections from the US Trustee in chapter 11, and from the bankruptcy trustee in chapter 13 regarding the amount of payment that is required to go to unsecured creditors.

Your idea is in no way novel or new, everyone knows how this is done, it's just it can only practically be done in a rare set of circumstances.