Cram Down Legislation: If Only Ty Pennington Could Get At It
To suggest that housing crisis problems we’re dealing with on March 4, 2009 are semantic in nature wouldn’t be fair.
Still, “cram down,” whether you hyphenate it, make it two words, or one, is just plain unsavory as a term. Which is probably why it stirs eruptions of vitriol about who’s getting stuck with what as conversation about whether it’s an appropriate tactic to bring to bear as smart people try to come up with smart strategy to battle the fact that people are losing their livelihoods by the 700ks every time we turnaround thanks to housing’s free-fall.
Whoever made up the term cram down is probably the same kind of person who’d invent that kind of plastic packaging that winds you up in the emergency room when you try to get at the electronic device you bought and want to open. Those people should go to a dark, fiery place for all eternity.
Two events gave us an idea about all this. The idea is basically this. Hire an ad agency, like R/GA in New York, and stop calling things names that sound vaguely like sticking a finger down your throat to get the desired effect. I.E. Brand the bugger!
Now that we’ve tipped you off to the idea, we’ll tell you about the two events that led to it. One was this. Did you notice something weird this week? U.S. Treasury Secretary Tim Geithner talked–a lot, and under a lot of pressure–and the stock market didn’t go into a WWI-style air casualty. Why? Branding. If Tim Geithner can be media trained into greater proficiency in selling in his genius to America’s elected representatives and to white-knuckled Wall Street investors, then, by all means, let’s fully explore the possibilities here.
For instance, look here. It’s New Deal 2.0, a promise of big government value on your taxpayer dollar.
Click image to original Wall Street Journal coverage on Obama's branding of the recovery in "Real Time Economics."
Who, after all, will be our protracted downturn’s Diego Rivera?
Now, back to cram downs. Here’s a prophetic Calculated Risk post from 2007 that’s about the best explanation and rationalization for the procedure that we’ve seen to date. In other words, it’s not about being overly generous to those homeowners who might be undeserving. It’s about making lenders pay the price for their greedy, unscrupulous practices and setting up a standard by which they’d never do it again.
I have some sympathy with the view that mortgage lenders “perform a valuable social service through their loans.” That’s why, when they stop doing that and become predators, equity strippers, and bubble-blowers instead of valuable social service providers, I like seeing BK judges slap them around. Everybody talks a lot about moral hazard, and the reality is that you’re a lot less likely to put a borrower with a weak credit history, whose income you did not verify and whose debt ratios are absurd, into a 100% financed home purchase loan on terms that are “affordable” only for a year or two, if you face having that loan restructured in Chapter 13. If you are aware that your mortgage loan can be crammed down, I’m here to tell you that you will certainly not “forget” to model negative HPA in your ratings models, and will probably pay more than a few seconds’ attention to your appraisals. You might even decide that, if a loan does get into trouble, you’re better off working it out yourself, via forbearance or modification or short sale, rather than hanging tough and letting the BK judge tell you what you’ll accept. That would be a major bummer, right?
Fast-forward to the present for a more updated take, posted on The Huffington Post, from David Abromowitz, senior fellow at the Center for American Progress, which probably has an ideological bent we’re not entirely supportive of. Still, we’re behind the philosophy of the assertion here.
Congress needs to finally enact a bankruptcy reform bill that includes one of the few real tools for breaking the grip of the devastating downward foreclosure spiral. There are many sound economic and policy reasons for Congress to provide a judicially approved “cram down” possibility for homeowners. Yet one basic reason gets less mention — it is simply a matter of fairness.
Few Americans realize that single family homeowners living in their own primary residence are the only real estate owners without cram down protections in bankruptcy. As U.S. Bankruptcy Court Judge Louise DeCarl Adler has aptly captured it, “we could always rewrite the loans on John McCain’s second through ninth homes but not on his first.” Donald Trump wouldn’t — and couldn’t — sign away his right to have a bankruptcy judge reduce the principal mortgage balance of a loan on one of his properties, but a homeowner starts out with Congress having previously taken that option away. Maybe with 1 in 5 families with a mortgage owing more than their house is worth — most of whom borrowed within their means when they first took out their loan — and 8 or 9 million households still potentially facing foreclosure, Congress will put homeowners back on equal footing with real estate moguls.
The measure is said to be due for vote in the House of Representatives Thursday. That’s probably enough time for a good advertising agency to turn around a campaign to rebrand the issue, and give it an entirely more asethetically compelling value proposition.
Move that bus!
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It’s hard to put these things into perspective. On one hand banks will fight tooth and nail to prevent a loss and wait for the government to bail them out and on the other hand they will cry when BK comes a knocking. Now they want regulation. Now that their poor business practices have led them into financial ruin they want corporate welfare. These banks have taken whatever position is most convenient for them at the time.