Faith & Social Justice: In the spirit of Richard Overton and the 17th C. Levellers

Banks Win, Homeowners Lose

I haven’t been a fan of every part of Pres. Obama’s economic policies, but I was a big fan of his plan to stop the mortgage crisis.  One part of this plan was urging Congress to change bankruptcy laws to allow bankruptcy judges to “cramdown” and renegotiate mortgages.  This is already done with second homes, but is illegal for primary residences. This common sense reform would keep thousands of people out of foreclosure.  It would stop the bleeding in the mortgage industry which was one of the first dominoes to fall in the recession.

Sen. Dick Durbin (D-IL) has led the battle in the Senate for the bankruptcy reform.  Yesterday, he expressed his frustration saying of Congress, “the banks own this place.”  Today, he was proven right.  The Senate, including 12 Democrats, sided with the banks over homeowners.  This is extremely discouraging because it shows that big money is so corrupting that progressive reform is difficult. It would be impossible to replace 12 bank-over-homeowners Democrats with 12 pro-cramdown Democrats in 2010–and ZERO Republican senators voted for reform.

By contrast, during the Great Depression, the federal government guaranteed home mortgages directly–and every dime was repaid with 90% of homes saved.

Thanks, Congress for making economic recovery harder and loving banks (whom we taxpayers are saving) over ordinary Americans.

This is why electoral politics must be supplemented with street protests and other forms of movement politics.

April 30, 2009 - Posted by | economic justice


  1. It might have been different if the government, during the Great Depression, was being asked to guarantee more than 12 trillion in mortgages.

    I agree with you that the banks should never have been bailed out, but I don’t this law was the right move.


    Comment by rowelawllc | April 30, 2009

  2. Moral Hazard, pure and simple. We can not encourage bankruptcy and walking away from contracted debts. Notice you say “By contrast, during the Great Depression, the federal government guaranteed home mortgages directly–and every dime was repaid with 90% of homes saved.” EVERY DIME WAS REPAID. Cramdowns are exactly not this. If a lien was put on your future earnings or homes for the amount of the cramdown, then it might be a responsible restructuring, but the language as it was stated was simply suicide (again) for the banks (cramdown of principal to present value of the home with the remaining debt unsecured). Not to mention what it would mean for mortgage insurance costs, mortgage rates, eligibility of lower-credit score borrowers for mortgages. This would not have been net positive in its form for “ordinary Americans”.

    This is similar to the government’s request that Chrysler and GM creditors take a 90% haircut on their loans for “America”. Anyone, Michael, can be generous with other people’s money.

    Comment by stan | May 1, 2009

  3. I never said that the banks shouldn’t have been saved. I just would have nationalized them, forced open their books (which could tell us how much fraud was involved in the credit default swaps), wrote down as much debt as possible, stabilized and reprivatized them. That’s what was done with the Savings & Loan scandal and mandated for future bank insolvencies. This bailout, even if it works, is far more costly and takes longer. I also would have fired all the top execs, forced lowere management pay, no bonuses until the banks are once more profitable and the taxpayers are repaid–and would force the banks to loan again–though not in the previous risky manner.

    Comment by Michael Westmoreland-White | May 1, 2009

  4. The govt. was repaid, not always the banks making the original loans. As for being free with “other people’s money,” those banks holding those mortgages would already be broke without the taxpayers’ money. They are not showing the same consideration to others as is shown to them. And in MANY, MANY cases, people are in foreclosure or close to it because of fine print in sub-prime loans that the banks pushed in predatory loans. Taking a loss in order to help the entire economy rebound (and, thus, not lose more customers to foreclosure) would be in the longterm interest of the banks.

    Bankruptcy judges can already cramdown mortgage principle on second homes, cars, boats, so why not primary residences. This is law designed to give rich people better treatment than working people. These bailed out banks used our taxpayer money to LOBBY congress against this bill–to all of our detriment.

    Comment by Michael Westmoreland-White | May 1, 2009

  5. If the banks collapse can the nation be far behind. Money = Power. Obama has his feet to the fire to a small degree. people will start to turn on him if they continue to lose their homes, jobs and life savings. This is human nature. Did you ever really read the fine print on Credit Card bills ? 🙂

    Comment by Paul | May 1, 2009

  6. I never argued for allowing the banks to collapse, Paul. This is a red herring. Changing bankruptcy law in this way threatens no bank, but it saves homeownership and thus is a faster road out of the recession. Obama was in favor of this legislation, but didn’t work had to see it pass. Now it has failed to pass the senate. This is the first legislative loss for his administration and its a big one. It wasn’t even close.

    Comment by Michael Westmoreland-White | May 1, 2009

  7. To address your class warfare argument, from testimony last fall before the Senate:

    “Let me clarify how current law works. If someone in bankruptcy were to have a four hundred thousand dollar mortgage on a vacation property and the judge were to reduce that to three hundred and fifty thousand dollars, the debtor would be required to pay off the entire three hundred and fifty thousand dollars in equal monthly payments during the three-to-five year repayment plan, not over the course of thirty or even forty years. More likely, the judge would force the debtor to sell the vacation home.Vacation home customers pay for this added risk in four ways: significantly higher down payments, higher interest rates, higher origination fees, and shorter, more expensive loan terms.”

    Or a secured creditor can deny the cramdown option and proceed straight to foreclosure since the vacation home is not essential to the debtor’s livelihood. They agree to the cramdown because the lower amount is equal to the net present value of the 10 or 15 yr mortgage anyway.

    Most banks aren’t on the dole right now and shouldn’t be forced to write down all their assets (our loans) when they are struggling to maintain capital already. The only solution which wouldn’t cause a banking collapse, as I said, is to maintain the value of the loan by restructuring and changing the interest rate or putting a lien on the future property appreciation for that bank. Just a 10% cramdown on a significant portion of loans without a corresponding lien would wipe out the capital of any healthy bank or credit union. And most of the cramdowns are for 30% in Nevada, Arizona, California, and Florida.

    Comment by stan | May 1, 2009

  8. Of course most of the cramdowns are in Nevada, Arizona, Californiia, and Florida. A. That’s where most of the severe housing crises are (I’d add Michigan) and B. those were the spots of the most egregious predatory lending took place.) Credit unions are not affected. They don’t deal in sub-prime lending and they have less than 2% of loans ever go into default for bankruptcy or other reasons. Why? Because they are not-for-profit local institutions. (We belong to one.) They, like local community banks know their customers. They don’t give out loans to meth-heads without jobs and they don’t engage in predatory lending, nor credit default swaps.

    So, your argument holds no weight. This bill was not stopped because of the precariousness of community banks, much less credit unions. The community banks have largely been re-newed by the FDIC after briefly going into receivership. This bill was stopped by the lobbyists working (with our money) for the large bailed out banks on the dole.

    And most mortgages are for 30 years.

    Comment by Michael Westmoreland-White | May 1, 2009

  9. Michael, you don’t understand. The credit union lobby did indeed oppose cramdown, that was the source of my quote. Moral hazard encourages everyone to play. Credit unions gave out mortgages to better credit risks but declines happened to everyone in those regions. This problem is not isolated to subprime borrowers. I’m not picking on those areas. I am saying the declines of 30% in those areas encourages EVERYONE to seek a cramdown. And cramdowns of that magnitude would indeed kill banks because of the normal leverage involved. Again restructuring is necessary not gifts of principal reduction. Banks must be made nearly whole by interest rate adjustments lengthening the term or slapping a lien on the borrower. This legislation didn’t even ask whether a workout had been considered with the mortgage company prior to bankruptcy. Moral Hazard plain and simple. No one would ever get a loan again at low rates, or without a huge downpayment, and with much higher mortgage insurance.

    The point about mortgages being 10 or 15 years is for vacation homes – note “shorter loan terms” in the Senate testimony. It’s the price of having cramdown options there.

    Comment by stan | May 1, 2009

  10. Has it occured to you (or the banks), Stan, that in this economy this bill would actually help them? Sure, they lose money this way. But it prevents foreclosures. With foreclosure they lose MORE money. The banks are struggling as you say. So how much more will they struggle with thousands of more foreclosures that could have been prevented through cramdown of principle. Lose a little vs. lose everything.

    The cramdown puts a floor under the housing market. It stops the downward spiral. It starts housing values going back up (slowly) and so keeps the banks from being stuck with even more foreclosed homes that won’t sell.

    Comment by Michael Westmoreland-White | May 4, 2009

  11. Banks and mortgage companies have “workout” departments for to prevent foreclosure by adjusting terms, delaying payments, etc. They are good business trying to ensure the income stream, keep their assets performing. A “cramdown” without a compensating payment through a lien on future appreciation is simply breaking of a legal contract, reducing your debt is stealing someone else’s asset(the mortgage not the house). That asset is now often owned by you or me in a bond or pension fund or something similar. We deserve to be made whole. You aren’t just sticking it to banks. You are just taking money from people like me who rent, and couldn’t afford a home in the bubble. Little did I know that I could have had all I wanted at a discount all on Michael’s dime!

    This lien arrangement is a key needed innovation, what if the market rebounds? the bankrupt party profits? The cramdown solution already ensures insolvency of many banks, but if the market rebounds banks get no benefit for their generosity? There is no justice in that. How long do you think the thousands of homes outside Las Vegas will pay their mortgage of 300,000 while their neighbors keep their home with mortgages written down to 150,000? Many who can pay simply will not if they know they get to keep the house.

    We all have empathy for homeowners in a bind (my parents, right now!), but I have empathy for the homeowners who run banks too. Remember to love your enemies, Michael!

    Comment by stan | May 4, 2009

  12. First of all, I rent too. Until later this month, that is, when we close on our first house. I will be fine. I will have a 30 year loan at 4.5% thru my credit union and will get $8,000 too. Its existing homeowners like my parents and yours that I worry about.

    I’m not trying to “stick it to the banks.” Not to the small banks, anyway. I’m trying to stop the housing bubble crash that was one of the first dominoes to fall in this economic crisis. And those programs you talk about through the banks. There were major stories in many media about how they aren’t working. If we cannot save the homes, nothing we do with creating jobs through stimulus or shoring up the financial industry whose reckless behavior has threatened the whole world, will help. We’ll just have millions of homeless people more than now.

    You ask how many will keep paying at one price while their neighbors are cramdowned. (No one now since there won’t BE a cramdown!!!) How many will keep paying mortgages at $300,000 when the property is already DEVALUED to $100,000 or less? People who aren’t even in trouble are now paying mortgages for property that is worthless because the foreclosed homes have dragged down everyone’s propety values.

    If the cramdown isn’t the way to stop this, Stan, what is? And please, share this answer not just with me, but with Senator Durbin and all those trying to stop this crisis.

    Oh, and loving enemies does not mean giving them what they want if others suffer for it.

    I’m not trying for revenge. My loyalties are just with the ordinary people, not the reckless banks who have (with government help dating back to 1981) all but destroyed the global economy. If I have to choose between the two, I know where my choice lies.

    Comment by Michael Westmoreland-White | May 4, 2009

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