I’ve been reading many interesting comments online about yesterday’s Supreme Court ruling in Espinosa. Some of my colleagues are suggesting that this is a huge win for consumer debtors. I think Mr. Espinosa is justifiably happy. I’m not sure creditor’s attorneys are happy. I’m think debtor’s attorneys can be happy, sort of. I think Bankruptcy Judges might have something to be concerned with… and if it concerns Bankruptcy Judges, it ought to concern me.
And it does.
Over the holiday weekend, there were a number of press reports about a discussion paper, Under Water and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis. Reportedly Brent T. White, an Associate Professor at the University of Arizona’s James E. Rogers College of Law advocates that homeowners who are underwater (meaning, the outstanding mortgage balance[s] is more than the value of the home…is now, or in some cases, will ever be) should simply walk away from their obligations and not look back without feeling a bit of guilt. Obviously this all got my attention, but before I took to this here blog and declared “You Have Got to be Kidding Me!” (which at first glance seemed like the most expedient way to address it), I opted to read the discussion paper (rather than just the abstract). Before you click the link below, pour yourself a fresh cup of tea.
Here’s my take:
From MSNBC:
A dozen Democrats joined Republicans in the 45-51 vote to scuttle the bill, which Obama had said was important to saving the economy and promised to push through Congress. But facing stiff opposition from banks, Obama did little to pressure lawmakers who worried it would encourage bankruptcy filings and spike interest rates.
I remind everyone that next year, 2010, is an election year. If you want to know who to blame, here’s the roll call vote.
From Today’s Washington Post:
Days before an expected vote, Senate leaders yesterday touted their version of a proposal to allow bankruptcy judges to modify mortgages, but have yet to secure the support of the financial services industry and face fierce opposition that could derail the proposal again.
The characterization of the opposition being “fierce” is unfortunate, but it appears to be accurate:
“I hope we can muster the courage and find the votes, although I know it will be hard,” (Senate Majority Whip) Durbin (D-Ill) said on the Senate floor yesterday. Durbin has been pushing the measure for more than two years. “It’s hard to imagine that today the mortgage bankers would have clout in this chamber, but they do.”
For more on the President’s Foreclosure Prevention Plan, click here.
A report from Housing Wire suggests that the answer may be ‘no’.
“[Senator Richard] Durbin [D-Ill] had a hell of a time coming up with a bill that’d pass the Senate,” said Burt Ely, a banking expert and principal of Ely & Co. “He’s watered it down so much that his proposal now limits the accessibility or intention of the bill. Even if he got it passed, the gulf is so big it wouldn’t even get out of [the House] conference committee to be enacted into law.”
Not surprisingly, consumer advocates are seeing red.
“With Durbin, Dodd and Reid doing the bidding for the banks, this current state of the cramdown bill will have virtually no impact for at-risk borrowers,” says Bruce Marks, CEO of Neighborhood Assistance Corp. of America, a mortgage broker and consumer activist. “The Senate Democrats have made no measurable actions this year to help the housing crisis.”
Word out of Washington is that HR 1106 will be voted on next week. Today’s debates and votes were procedural in nature.
Apparently, this gives more time for the highly-paid bank lobbyists to organize their “packs” and convince House Members that allowing Chapter 13 debtors to cram down the mortgage on their principal residences will bring their the world ever closer to financial ruin. From The Huffington Post:
“We continue to be opposed to the bill and that hasn’t changed, but we do live in the real world, and we do understand that this is very likely to happen, and we owe it to our members to recognize that reality and to limit the damage as much as possible,” said Francis Creighton, a lobbyist for the Mortgage Bankers Association, which spent $4.2 million on lobbying last year. “We’re encouraged by the fact that the bill is moving to limit the damage of cram-down rather than make it worse.”
At the very least, you can see that my quip about them being “highly paid” was not altogether gratuitous. But what is this about the “damage” of cram-down? Give me a break.
Perhaps Mr. Creighton and his fellow highly paid lobbyists are not aware that cram-down is already happening in the bankruptcy system and so far, vast bread-lines have not formed because of it. Indeed, if the facts justify it, I can propose a cram-down for anyone with the following: investment property; an owner occupied two or three family home; a family home that also has commercial space (such as a store front with living space above it – very popular in some towns on the Cape); a car (subject to certain limitations imposed by BAPCPA – which are not particularly relevant for this discussion); and a boat. Actually, we can cram down any boat big or small provided the facts justify it. I just cannot do it on people with single family residences. Congress is trying to change that.
So why is the lending industry spending hoards and hoards of cash to stop it? Again, from The Huffington Post:
[T]he mortgage industry contends the measure will impose steep and unpredictable costs on its companies, which will be forced to pass them along to borrowers in the form of higher fees and interest rates. The industry spent millions last year on a successful lobbying effort to kill the bill….
Higher fees and interest rates? Perhaps they if spent less on lobbying, they would not need to charge higher fees and interest rates. But putting my comedic skills aside for a moment….consider this illustration:
Bob and his wife live in West Roxbury.* He has worked as a State Employee for 15 years, and his wife took a job as a manager of a Circuit City after they had their third child, who is now 5. His wife will soon be unemployed and will be trying to get back to work in retail which is (to put it mildly) struggling. Bob is not sure he’s going to survive the the budget cuts his department is facing. In 2004, they refinanced their home to pay bills and to get what they thought was a lower rate for a few years. And it was…but for only two years, but they assumed (and in hindsight now see that they assumed incorrectly) that they could refinance their way out of it. The house is now worth $250,000. The mortgage totals $350,000.
If Bob lives in a single family home on a nice lot, he cannot currently cram down the mortgage in chapter 13.
If Bob lives in a two-family home, where he and his family reside in the larger of the two units and the second is rented out to tenants (who may, or may not be current on their rent), currently he can cram it down.
So this claim that “if bankruptcy judges can modify loans, the world and all you know and love will end as we know it” is really just fear-mongering. Why do we know this? Because cram downs are already allowed. Just not for Bob and his family if he is living in a single family home. The only question left: why the fear-mongering?
HR 1106 is not about cram downs – it’s about fairness in the bankruptcy system. Please make sure your leaders know this.
*Fictional characters in a nonfictional town. Any resemblence with actual people in West Roxbury (or anywhere else) is entirely coincidental…with that said though, if this is you, we should talk more about your options.
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