The Senate cramdown of mortgage cramdowns

Noam Scheiber has a nice explanation of why mortgage cramdowns lost out in the Senate Thursday but safe harbor for mortgage servicers will probably make it into law.

Both provisions are about making it easier to change the terms of troubled mortgages—in particular by reducing the amount owed to reflect the collapse in home values over the past couple of years. In both cases, opponents objected that the changes mess with the sanctity of contracts and will discourage investors from buying mortgages, thus pushing rates higher than they would otherwise be. In fact, it’s far from certain that mortgage rates would rise as a result of either change. But no matter. Scheiber’s story is about the politics, not the merits:

With cramdowns, both the banks and investors (hedge funds et. al.) were united against giving bankruptcy judges the power to change mortgage terms, while safe harbor gives the servicers (a.k.a. the banks) freedom to make changes without fear of getting sued, so they’re all for it even though the investors hate it. And in Washington, divide and conquer remains perhaps the most important rule of political success. Safe harbor it is, then.

Stocks Rally Further in Run-up to EU Summit

MOSCOW — Global stocks enjoyed one of their best days in weeks on Tuesday ahead of a summit of European leaders that’s expected to be dominated by calls to boost economic growth.

Europe remains the focus of attention across all financial markets in the run-up to the June 17 Greek election that could go a long way to determining the country’s membership of the euro as well as the future of the single currency zone.

donthelibertariandemocrat

There seems something odd about asking banks to make money, and then asking them to take losses on bonds and mortgages. On the other hand, we’re in a tangled web of government actions that Raymond Smullyan couldn’t explain.

My view is that, since AIG, unless somebody gets a bailout or subsidy, they become very principled and hard to negotiate with. There’s a kind of implicit greasing that’s expected for compromise. The government’s answer is to try and turn these holdouts into Uriah Heep, which, in some cases, isn’t a bad characterization.

I like the idea of cramdowns, but for the fact that, in a downward move like the one we’re experiencing in home prices, I don’t trust anyone to know how to fairly set the price or terms of a house. In other words, it might simply delay foreclosure, and not stop it.
tc125231

I moved to and bought a house in a “hot” Southern Oregon market last year, driven by my wife’s youth there. It was a decent price, although the market was and is down way less than the national average.

I looked at a lot of foreclosed houses, and uniformly, the following was the case:

1. All electricty was turned off, and no yard care was being performed. The “damage factor” to these homes’ value appeared to me ro exceed $20K per month. After 6 months in the banks hands, what you had was land with no landscaping, and a shell to be gutted.
2. Nobody at the banks had the slightest idea where the property boundaries were, what the water rights were, etc.

Basically, “cramdown” of any variety would be a better financial deal for the banks than what they are doing. They are just destroying teh value of their holdings.

It couldn’t happen to a more “brighter” or deserving bunch.
Barbara Kiviat

@donthelibdem: Your first point is a good one. It’s the same thing at Fannie and Freddie, right? The Administration wants the GSEs to implement all of Treasury’s housing-rescue plans, whether or not those policies make good business sense for the GSEs, and yet when the GSEs don’t show a profit, or God forbid, pay their employees so that they don’t quit, politicians get all up in arms.