Bankruptcy Cramdown Defeated: Banksters Again Prevail Over Real Economy

In another disheartening development on the banking front, the Senate defeated legislation giving judges the authority to modify residential mortgages in bankruptcy.

Note that the popular description is often misconstrued in short form descriptions. Judges would not have had open-ended authority to make changes. The construct is that mortgages are collateralized loans. The mortgage balance is written down in bankruptcy to the value of the collateral, and the excess is added to the unsecured creditor claims.

This is also not an arcane process. It’s used in commercial bankruptcies and lending against boats, for instance. Ever hear any complaints about this practice in Chapter 11?

It was the best hope for cutting the Gordian knot of mortgage securitizations. First, it would allow for decisions on a case-by-case basis. Second, the servicer would get paid (fees are well established for court action in foreclosure). Third, the fact that a judge could force a principal writedown would give servicers air cover to do deep principal reductions, which Walter Ross, who owns the biggest third party servicer, has found do much better (in terms of borrowers paying on time) than the shallower mods coming out of government sticks and carrots.

This is not good news at all. It bodes ill for the housing recovery (the sooner prices bottom, the better; all these phony programs and fighting to find ways to suck more income out of hopelessly underwater borrowers is anti-recovery. The history of past bank crises shows that bankruptcies and debt restructurings are a necessary step to recovery. Trying to impede that puts the interest of the banksters ahead of the collective good. But why should we be surprised? This has been the modus operandi since the crisis began.

From Bloomberg:

The U.S. Senate rejected a measure that would let bankruptcy judges cut mortgage terms to help borrowers avoid foreclosure, a victory for banks and credit unions that said the legislation would increase loan costs.

The proposed “cram-down” amendment to a housing bill was defeated today in a 51-45 vote, with 12 Democrats among the 51 opponents. The measure needed 60 votes to pass over Republican objections. The House passed its version 234-191 on March 5.

“These bankers who brought us into this crisis are literally shunning and stiff-arming the people who are facing foreclosure,” said Senator Richard Durbin of Illinois, sponsor of the legislation and the chamber’s second-ranking Democrat.

The defeat is a setback for President Barack Obama’s administration, which included cram-down in the anti-foreclosure plan aiming to help 9 million homeowners. The mortgage industry has twice succeeded in helping to kill the proposal since Durbin first introduced it in 2007. The senator said today “this is not the last time” he will raise the issue.

Democrats led by Durbin had sought a compromise on the measure with JPMorgan Chase & Co., Wells Fargo & Co., Bank of America Corp., the American Bankers Association and Financial Services Roundtable. The lenders that scuttled the negotiations are “surviving today because of taxpayers’ dollars,” Durbin said. The three banks he named received $95 billion in U.S. aid.

“It’s clear that part of the mortgage industry was never interested in meeting us halfway, as negotiations went forward, they moved the goalpost back and back,” said Senator Charles Schumer, a New York Democrat.

An older trader’s saying is “little pigs get fed, big pigs go to slaughter.” In this case, the parasite is successfully sucking the life of of the host.

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15 comments

  1. Justin

    Democrats voting against the measure were: Sens. Max Baucus (Mont.), Michael Bennet (Colo.), Robert Byrd (W.Va.), Byron Dorgan (N.D.), Tim Johnson (S.D.), Mary Landrieu (La.), Blanche Lincoln (Ark.), Ben Nelson (Neb.), Mark Pryor (Ark.), Jon Tester (Mont.), Tom Carper (Del.) and Specter.

    Some of these I get–Landrieu and Nelson are always committed to voting Republican, SD and DE are bankster states. But the Montanans? Arkansans? Bennet? What do they get out of this? All I can think of is they’re red state Democrats providing cover to blue state Democrats who really don’t have an interest in voting for this thing (like Schumer.)

  2. Robert

    I can’t stand the banks but have to side with the banks on this issue- we need to quit delaying the quick death of the American Dream- many of the workouts that were done previously ending up in re-defaults, just making this take that much longer- get the people out- let them rent- trust me there are rentals all over the place- its not the end of the world- and most likely the house that is being foreclosed upon is worth less than the loan- let the banks take the hit- don’t drag it out any longer than need be.

  3. sangellone

    You can’t defy gravity. Somebody has to take the loss. Banks owe people money too.

    Where I come from, if you borrow money you pay it back. If you can’t there are consequences. One of them being you don’t get to keep the asset you borrowed money to buy be it a car, a diamond ring or a personal residence.

    Default is messy but losing a car can be more devastating than losing a personal residence. Losing a ‘diamond ring’ may result in losing the ‘love of one’s life’.

    As far as I can see, there is no valid reason to allow a person to keep a personal residence that they cannot afford to pay for than there is to allow a person to keep any other asset that is not an true investment.

  4. HUMBLE HEALER

    The mongrel three headed, goat-footed beast (bankster, special interest politician, snake) has carved out another blood feast.

  5. tyaresun

    Robert and Sangellone,

    It is not as if the home owners are going to get the homes for free, they will be paying the current prices. With the current strategy, if the the economy does not improve pronto, the banksters, the home owners as well as the rest of the tax payers suffer.

  6. "DoctoRx"

    And where was the President? Floating like a butterfly above the fray?

    When Clinton wanted the tax increase passed in 1993, he twisted every arm he could. And he didn’t have many of the advantages of BO.

    This is just one more example of the Obama administration going along with the wishes of Big Finance. The whole vote was a sham, IMO. The Dems can say they tried, crossing their fingers behind their backs.

  7. Anonymous Jones

    Pigs get fat, hogs get slaughtered…indeed. It’s a cliche for a reason, remember.

  8. mmckinl

    Yep … Own a million dollar house in Aspen, your second home, get a cramdown on the money you owe the bank. Own a 100′ yacht, get a cramdown on the money you owe the bank.

    Own your own home, a tiny bungalow, for you and your two children … tough shit … you owe the bank all the money … period.

    The Senate is shameless, shameless … just as they are with Hedge Fund managers that take capital gains on earned income because of a loophole.

    Thanks Yves …

  9. Carrick

    Think this hurts? Try watching them gloat…

    Mortgage Bankers Association Annual Meeting (and celebration of their looming victory)
    http://www.youtube.com/watch?v=vS_6zn3B0pw

    “Yesterday Sen. Richard Durbin, a sponsor and loud advocate of cramdown, said just yesterday, ‘Its hard to believe, that today, the bankers have any clout in this chamber of the Senate, but they do.’ That means its working!”

  10. Jesus

    Will they still think things like this are a good idea when the floor falls out from their feet and their hear the snap of the rope?

    You can only keep stealing from the proles and rub it in their face for so long. Maybe they are just hoping ‘its different this time’.

  11. Richard Kline

    I’m not surprised by a single one of those Bought-and-Paid-for 11; they’re all Republicrats who work for the wealthiest 1%, not the schlubs who blackened an oval for them.

    Here’s the deal: those homes aren’t worth the loans face, not nearly, and many can’t afford that face number, and never could. The banks and the wealth behind them can scream all they want regarding the sanctitiy of captial, but we see them creeping round back of their local Fed for pallets full of money in the dark o’ night. Many, many of those loans are _never going to be paid off_, greedfest votes like this notwithstanding. Someone is going to have to take that loss, and in the end, the title holder is not going to be the one, in many cases. All this does is string out the problem longer—which is the goal. The banks and those holding MBSs are hoping to block and real asset write-downs until _AFTER_ then can sell all to the government at near face: that is the game plan. Once the stupes in the government are holding the notes, then they can take the multi-trillion dollar loss if they want to; the banksters will have gotten out comfy and clean.

    I’ve thought from early on that the real solution is mass noncooperation with note payment. But Americans don’t do ‘organization’ so every debtor cowers in his bungalow, alone. Until he/she doesn’t. The banks, they aren’t waiting. They have our elected representatives working tirelessly in their interest . . . .

  12. attempter

    I agree with those who see the political process as a sham.

    While I don’t personally mourn the defeat of what looks to me like a meager anodyne reform where what’s needed is absolute systemic change, it’s still instructive as yet another example of how, once feudal obstruction has become sufficiently entrenched as it has in America, you can do nothing with it through the existing personnel, and probably not through the existing system.

    Even a reformer who thinks the system is redeemable, if he’s not one of the absurd optimists alluded to in Yves’ post above, has to be a pessimist by now about the so-called “two party system”.

    He has to agree that not even reform can be accomplished through the Democrats.

    (BTW, the Dems are not only corrupt themselves, they are also the most abject of cowards.

    In this piece I read again the nauseating construct “nothing can be done without 60 votes”.

    1. Why from 2003 to 07 did I NEVER ONCE hear that the Reps needed 60 votes?

    2. Regarding this threat of a filibuster, why haven’t the Dems been saying since 07 “bring ’em on; we remember how well shutting down the government worked out politically for them back in the
    90s”?

    We know the answer: simple cowardice.)

  13. Terry

    Hello…The vote todat speaks volumes on the dirty power grab. Citizens have had enough injury due to these greedy bankers…and now we have had enough insult.
    Not another dime of taxpayer’s money should go to bailing out these unethical corrupt corporations. I hope evryone of the senators that voted against the act will be voted out of office. “Those with power exploit those without power…and those without power continue to be exploited by those who are in power to represent the interst of the citizens…how sad.

  14. Susan

    I am told by two sources that big banks smell an upturn, so they’re refusing to do loan modifications (even the banks that took federal money) and they’re even refusing short sales. They’ll let you sell the house for less than you owe, but they demand the seller make up the difference.

    Why are we not marching on the banks? Why aren’t we making so much noise we can’t be ignored?

    The banks are in trouble, they scream, they get money. But the taxpayers who saved them? Nada.

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