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Summer Rerun: Bankruptcy Cramdown Defeated: Banksters Again Prevail Over Real Economy

This post first appeared on April 30, 2009

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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25 comments

  1. Black Smith

    “The senator said today “this is not the last time” he will raise the issue.” I’m afraid to hope at this point.

    WikiLeaks: China, Paulson at odds over threat from subprime crisis
    http://www.mcclatchydc.com/2011/09/04/122986/wikileaks-china-paulson-at-odds.html

    “If regulation had preceded innovation in the United States, it would have had a negative impact on the development of the U.S. economy,” Paulson stressed, according to the cable.

    Is that a punchline or what?

  2. Z

    “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.”

    It was no defeat for the obamination administration … they didn’t lift a finger for it and simply waited for it to die.

    durbin talks a good game, but he is in the tank for his former fellow illinois senator too.

    Z

    1. attempter

      Yup. And let’s never forget this kind of lie:

      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.

      51 senators can always pass anything they want. It’s a little thing called arithmetic that everyone except “progressives” learned in first grade.

      I imagine they’ll receive a remedial lesson as soon as the Republicans have at least 51.

      1. KenG

        51 senators used to be enough to pass any legislation, but since 2009, it now takes 60 votes. Republicans use the threat of filibuster for every bill they oppose. Democrats don’t have enough energy, or simply don’t care enough to make the effort to call the bluff. Obama is unwilling to risk high-noon show-downs, so he caves in on every issue (although I have to give him props for blocking the ATT acquisition of T-Mobile).

    1. Bhikshni Lozang Trinlae

      And the PR Chinese state economists would probably have done a better job of managing the banks than our failures who get rewarded for their failure to the tune of millions amidst a nation of hungry children.

  3. Conscience of a Conservative

    Has anyone drawn the link between mark to market and the willingness of banks to engage in loss mitigation? Regulators allowing mortgage loans be held at cost and then having those same regulators ask the bank to take an action that is totally contradictory( admitting the pretense and negotiate forgiveness and/or lower payments) seems contradictory and stupid.

    1. attempter

      Under mark-to-make-believe, shouldn’t they be more willing to write down loans (on what’s alleged to be an individual basis)? After all, now they have more tactical flexibility without having to deny the fraudulent principle, don’t they?

      They don’t do it because they don’t want to do it, not because those fiendish regulators maneuvered them into a “contradictory” position.

      (It’s of course the banksters themselves that wanted to kill mark to market. But for some it’ll always be heads-I-win-tails-you-lose, and no matter how much the banksters get what they want and do what they want, it’ll always be the regulators who are really “forcing” them to do it.)

      1. sless

        Since loan loss reserves are a contra asset account, loans held on banks balance sheet do reflect depreciated value.

  4. PaulArt

    Here is the Judas Iscariot honor roll:
    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 (Arlen) Specter.”

    1. Greg Colvin

      I just called my Senator Bennet and gave him a piece of my mind. Useless, I suppose, but I feel better.

    2. John L

      Many of those Democrats are in “red” states, and not from states with serious mortgage crisis issues like Florida, California or Nevada. IOW, they are taking a “no problem in my district” attitude while at the same time hoping the Teabaggers don’t target them in 2012.

      1. Not Senator Mark Warner

        The red state Democrats, as you refer to them, voted to defeat cramdown, as in, they performed an offensive action. You give the people way too much credit in “elections”, cramdown is so volatile to the elite that it would not pass. Besides, if it did, Yves wouldn’t have as much palp to inhabit her blog, since the so-called borrowers would no longer be used as powerless cannon fodder, and the whole fucking “problem mortgages, problem borrowers” bullshit would be over with. The elite will simply not allow that leverage for the masses, since they would have to “take a bath”, so they defeated it regardless of the party label idiocy.

  5. Freedom Works

    Ryan Grim, Huff:

    “The banking and real estate industry has funneled roughly $2,000,000 into Landrieu’s campaign coffers over her 12-year career, according to data from the Center for Responsive Politics. Bayh has taken in about $3.5 million. The financial sector is Nelson’s biggest backer; he’s taken $1.4 million from banks and real estate interests and another $1.2 million from insurance firms. Tester has fielded roughly half a million in his two years in office.

    That’s about nine million dollars.”

  6. The Administration that Kills

    Paul Kiel and Olga Pierce, ProPublica 2/4/11:

    “In the fall of 2008, Democrats saw a good opportunity to pass cramdown. The $700 billion TARP legislation was being considered, and lawmakers thought that with banks getting bailed out, the bill would be an ideal vehicle for also helping homeowners. But Obama, weeks away from his coming election, opposed that approach and instead pushed for a delay. He promised congressional Democrats that down the line he would “push hard to get cramdown into the law,” recalled Rep. Miller.”

  7. Who Bailed Who, Mother 'Effer

    Tracy Connor, NY Daily News, 3.20.09:

    “CNBC editor Rick Santelli let it rip on-air Thursday, leading a “mob” of Chicago traders in a mini-revolt against the government’s mortgage bailout plan.

    Gesticulating and shouting as cheers and boos erupted, Santelli called foreclosed homeowners “losers” and called for a Revolutionary War-style “tea party.””

  8. Goodfellas

    Matthew Cardinale , IPS:

    “The first-ever audit of the U.S. Federal Reserve has revealed 16 trillion dollars in secret bank bailouts and has raised more questions about the quasi-private agency’s opaque operations.
    “This is a clear case of socialism for the rich and rugged, you’re-on-your-own individualism for everyone else,” U.S. Senator Bernie Sanders, an Independent from Vermont, said in a statement.
    The majority of loans were issues by the Federal Reserve Bank of New York (FRBNY).”

  9. Obama: The Resignation Speech

    Glenn Greenwald, “The DOJ’s Escalating Criminalization of Speech”
    ..
    “Let’s be very clear about the key point: the Constitution — specifically the Free Speech clause of the First Amendment — prohibits the U.S. Government from punishing someone for the political views they express, even if those views include the advocacy of violence against the U.S. and its leaders. One can dislike this legal fact.”

    (c) Salon.com

  10. Schofield

    The so-called democratic federal and state governments in America have deteriorated into trade associations for large scale owners and controllers of capital. The people are befuddled by all of this. Eventually as poverty bites in a very serious way there will be revolt. Of what type remains uncertain at this stage.

  11. F. Beard

    A universal bailout of the population could fix everyone, including the banks and savers, from the bottom up and with no price inflation risk if combined with a prohibition on further credit creation.

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