Thursday, January 8, 2009 at 4:19 pm
The banks change their tune on mortgage cramdowns. It's about time
In what strikes me as a pretty major change of heart, Citigroup has signed on to Illinois Democrat Dick Durbin's effort to give bankruptcy judges the power to rewrite the terms of mortgages. Reports the WSJ:
The cramdown bill would apply to all mortgage loans, including but not limited to subprime loans, written any time prior to the bill's date of enactment. It allows judges the ability to lower principal or interest rate, extend the term of the loan, or any combination of the three. "Cramdown" refers to the ability of judges to lower a mortgage principal so that it is equivalent to the current market value of a home.
The banking industry thwarted such efforts by Durbin in 2007 and 2008. The WSJ portrays the deal as partly a PR effort on the part of Citi, which needs good PR these days. I'd like to hope that it also might mark the beginning of a realization on the part of bankers that being tough on bankruptcy law isn't always good business for them. Banking industry lobbyists slipped the provision restricting judges' ability to modify mortgages into the big bankruptcy reform act of 1978, and had argued in recent years that changing the law would result in a big rise in mortgage rates.
But the available evidence actually doesn't back this up. As I wrote a couple of weeks ago:
Georgetown Law professor Adam Levitin and Columbia economics graduate student Joshua Goodman gathered this evidence recently by taking advantage of a quirk in judicial history. Between 1979 and 1993, about half of all federal judicial districts interpreted bankruptcy law to mean that judges could modify first-home mortgages, while the other half interpreted it to mean they couldn't. The Supreme Court put an end to this in 1993 by ruling that the latter approach was what the law called for. Levitin and Goodman examined mortgage data from before then, and concluded "that mortgage markets are largely indifferent to bankruptcy modification outcomes." The reason for this, they contend, is that "lender losses in foreclosure would be greater than in bankruptcy, and so permitting bankruptcy modification as an alternative to foreclosure would, if anything, benefit lenders."
The bankers seem to be learning this lesson. They're still insisting that the bill only apply to past mortgages, not new ones. But it's a step forward. Maybe next it will begin to dawn them that, as some economists argue, the tougher personal bankruptcy rules they pushed through Congress in 2005 made the current financial crisis worse.
8 Comments and Trackbacks to “The banks change their tune on mortgage cramdowns. It's about time”
Leave a Reply
You must be logged in to post a comment.
RSS Feed |
- Adam Lashinsky
- Barry Ritholtz
- Brad DeLong
- Calculated Risk
- Econbrowser
- Econlog
- Epicurean Dealmaker
- Ezra Klein
- Felix Salmon
- Floyd Norris
- Greg Mankiw
- James Pethokoukis
- John Gapper
- Marginal Revolution
- Mark Thoma
- Matt McAlister
- Megan McArdle
- Michael Mandel
- Mike Moffatt
- Nicholas Carr
- Paul Kedrosky
- Philip Coggan
- Roger Parloff
- Ryan Avent
- Sarah Palin to Quit as Alaska Governor
- What Happened To the Stimulus?
- Michael Jackson Gets His Requiem
- Afterbirth: It's What's For Dinner
- Why British Health Officials Say Swine Flu is Nothing to Party About
- Does the E.U.'s Airline Blacklist Make Flying Safer?
- Pakistan Hopes for Answers on Bhutto Murder
- While Canada Spends Big to Save GM, Mexico Gets Free Ride
- This Preposterous Week! Paul Slansky's News Index
- How California's Fiscal Woes Began: A Crisis 30 Years in the Making
- Inside Michael Jackson's Neverland Ranch
- U.S. Marines Open a New Offensive in Afghanistan
- The History of the Bikini
- Photos: India's Contraband Wildlife
- Photos: A Madoff Family Album
- Michael Jackson: The Last Photos
- Public Enemy: The Extremely Brief and Violent Life of John Dillinger
- Photos: Sacha Baron Cohen's Outrageous BrÜno Promotions
- The World's Ugliest Dog Show
- Party On with the G-8!
Thursday, January 8, 2009 at 5:41 pm
call me a cynic, but Citi's willingness to give judges leeway on mortgages may be motivated by a desire to see no changes made in how credit card debt is handled by bankruptcy judges. Citi is one of the largest issuers of credit card debt (if not the largest), and I suspect that their ability to issue bonds based on credit card receivables would be severely impaired if we returned to the status quo ante that existed before the Biden Bankruptcy debacle passed.
Thursday, January 8, 2009 at 9:55 pm
The creatures outside looked from Justin to Barbara, and from Barbara to Justin, and from Justin to Barbara again; but already it was impossible to say which was which.
Friday, January 9, 2009 at 12:40 am
If the cramdown bill is such good policy why is it limited to only existing mortgages? As for the lawyers' comments, they seem to be backed up by no data and in fact compare pre-1993 data to post-1993 data. Those two periods were characterized by vastly different mortgage markets. Here is what I wrote this evening and it contains direction to other thoughts. http://www.butthenwhat.com/?p=905
Friday, January 9, 2009 at 8:11 am
@felixsalmon: In this metaphor, am I the pig, or is Justin? I should have more to say about this--mortgage rewrites, not Felix's exquisite taste in literature--later today.
Friday, January 9, 2009 at 8:17 am
tomlind...
the Levitin and Goodman study (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1087816) you are referring to uses two different perspectives to reinforce the conclusion that mortgage rates are "indifferent to bankruptcy modification risk, including strip-down."
_
The first perspective is "current". It extrapolates the indifference based on the fact that there is no significant difference in the treatment by lenders of different classes of residential real estate -- single family principle residence mortgages cannot be modified in chapter 13 filings, but mortgages on second homes, and in multi-family dwellings in which the owner has his/her principle residence, can be modified.
_
The second perspective (beginning on page 16 of the study) presents the "historical" data and finds that historically, it made no difference in mortgage rates/fees whether first mortgages could be modified or not prior.
_
The second perspective is much easier to explain in a magazine article, which is probably why Justin cites it.
_
(IMHO, the study is flawed because during the period studied all those entering bankruptcy had a choice between Chapter 7 and Chapter 13 filing -- and the availability of Chapter 7 probably mooted the issue of "risk premiums".)
Friday, January 9, 2009 at 10:43 am
Barbara, Justin's the pig. IIRC, the men didn't change much, only the pigs did. Justin's stealing your thunder, I tell you!
Friday, January 9, 2009 at 1:06 pm
If mortgage brokers analyzed the situation properly they might well do a cramdown before foreclosure. I know some are doing just that.
Friday, January 9, 2009 at 5:46 pm
@felixsalmon: Point taken. Back to you, sir: http://curiouscapitalist.blogs.time.com/2009/01/09/citigroup-and-dick-durbin-rewrite-bankruptcy-law%E2%80%94but-wont-the-investors-be-mad/. I considered titling the post "In which Barbara establishes that she is the man and Justin just a pig," but I thought that someone somewhere might somehow read that in a way other than intended.