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Banks will be allowed to reduce your mortgage balance based on its current market value soon.

FelixDeCat

FelixDeCat

Lifer
I entered the banking biz in 1990 and left in 2008. The mere mention of the word "cramdown" would should shivers down anyones spine in our business since it meant a writedown of a borrowers loan balance to reflect the current market value of a home. This was usually ordered by a judge as part of a personal bankruptcy filing. While this seems sensible considering the huge prop value drops experienced in certain parts of the country, it actually is not a good idea.

This outrageous practice was stopped in 1993 by the Supreme Court. Now, its about to rear its ugly head again. Why is this a bad idea? There are several reasons, besides the fact that it encourages reckless lending and borrowing it is something that people who buy mortgage backed securities will have to price in when bidding for pools of securitized loans. This means higher rates for everyone. Yipee!

Ill take our area for example, which has actually done much better than the national average. I was looking at a home around June of 2008 priced at $325,000. Back when I first noticed the property back in 1993, it was worth $96,000. It was worth about $158k by 2003, then "exploded" in value along with every other property in Fort Worth with everyone getting gas well lease payments. It was priced in 2008 at $350,000. The current owner did completey redo the interior and spruced up the backyard, so I dont know how much they put into it, but the property listing was pulled at some point. According to Zillow the last reported value was $284,000.

Now assuming that property was purchased for $325k, the borrower fell into trouble (which does happen to everyone, nothing to be ashamed of) and now the property is worth $284k, guess who "gets it" in a cramdown situation? In less than 7 months you are now looking at a potential $41k+ loss.

Good idea or bad idea?
 
Yay, more of my tax dollars going to help irresponsible people who should never have gotten the loans.

Too bad there's no legal way to make the bank executives pay back the billions in bonuses they've gotten for doing this.

Oh and
< ------ P&N
 
Originally posted by: JohnCU
damn i should have bought a house 🙁
Click to expand...

Probably. Probably not. If you had put 20% down, you would only owe $260,000 which is already LESS than current market value accrording to Zillow.

But if you got some fancy subprime 120% loan back in early 07, you probably would come out ahead at the expense of everybody else. 🙁
 
Originally posted by: MotF Bane
I have absolutely no idea what you just said. 🙁
Click to expand...

Heres another example. Prior to the 2005 bankruptcy reforms, auto cramdowns were still legal.

So lets say you buy a brand new Camaro for $25,000, owe $22,000, put 30,000 miles on it and now its only worth $12,000 when you file for bankruptcy. A judge could have ordered that the balance be reduced to $12,000 if you wanted to keep it and you could still afford the reduced payments.
 
CNN

If this becomes a reality, the millions of Americans struggling with onerous loan terms can tell their lender their intention to file bankruptcy, and that alone may be enough to propel a loan modification. And, a new loan could help as many as 8 million Americans who are at risk of foreclosure this year, says Durbin.
Click to expand...

Sounds like it would only help those that have adjustable interest rates or irregular loan and facing foreclosure instead of the responsible fixed rate and 20% down type. Unbelievable that they keep rewarding the risky.
 
Originally posted by: compuwiz1
Are they going to provide funds for people who are behind to get caught up?
Click to expand...

Heres the story.

All of this is prelimanary, and nothing is in stone yet, so things could change. While there are alot of programs out there to help homeowners in trouble, I havent heard of any that subsidizes payments.

A mortgage modification usually rolls deliquent interest payments back into the loan balance to bring a borrower current, reamortizes the balance over a longer term and lowers the rate to also make the payment affordable if possible. But I dont know of any subsidies yet.
 
Oh noes. The banks will "lose" phantom money.

Oh well, they could just do the foreclosure and "lose" more money, but if they want to save their asses they should do this.
 
Originally posted by: TheBloodguard
CNN

If this becomes a reality, the millions of Americans struggling with onerous loan terms can tell their lender their intention to file bankruptcy, and that alone may be enough to propel a loan modification. And, a new loan could help as many as 8 million Americans who are at risk of foreclosure this year, says Durbin.
Click to expand...

Sounds like it would only help those that have adjustable interest rates or irregular loan and facing foreclosure instead of the responsible fixed rate and 20% down type. Unbelievable that they keep rewarding the risky.
Click to expand...

I agree with you that this is not a good idea and that foreclosure exists to serve this purpose. However, sometimes responsible people with 20% downpayments still can get caught if they simply paid way too much for a property, or took out a bad mortgage on it using things like "12MAT loans". It was my job to service and enforce the terms of the worlds worst loan, 12MAT.

People who thought they were pretty savvy got sucked into signing 12MAT loans with monthly rate adjustments, a low 1% int rate good for 30 days, then youre upside down when I had to increase that to 8% on the 31st day. Now your payment is not even fully amortizing, which means you will now start paying interest on unpaid interest along with your original loan balance, giving you an interest rate that compounds to a rate higher than 8% eventually.

Want to refinance out of it now that I helped you figure out what you signed? Not before you have to pay a 20% prepayment penalty on your way out the door!
 
Originally posted by: AnonymouseUser
Oh noes. The banks will "lose" phantom money.

Oh well, they could just do the foreclosure and "lose" more money, but if they want to save their asses they should do this.
Click to expand...

how is it phantom and why did you use quotes? 😕
 
Originally posted by: FelixDeKat
I agree with you that this is not a good idea and that foreclosure exists to serve this purpose. However, sometimes responsible people with 20% downpayments still can get caught if they simply paid way too much for a property, or took out a bad mortgage on it using things like "12MAT loans". It was my job to service and enforce the terms of the worlds worst loan, 12MAT.
Click to expand...

I'm curious if cramdown would only apply to the original mortgage or for all mortgages. I don't think it is fair to give a cramdown to those people that refinanced and took equity out.

I wish they would allow Clawback and that it would be more draconian.

 
Terrible, terrible idea. I mean I like it on the surface but it's the affects that are so bad. All I can see from this is home prices dropping even more which would drive down ALL home prices - having a death spiral affect.
 
Originally posted by: FelixDeKat
Originally posted by: MotF Bane
I have absolutely no idea what you just said. 🙁
Click to expand...

Heres another example. Prior to the 2005 bankruptcy reforms, auto cramdowns were still legal.

So lets say you buy a brand new Camaro for $25,000, owe $22,000, put 30,000 miles on it and now its only worth $12,000 when you file for bankruptcy. A judge could have ordered that the balance be reduced to $12,000 if you wanted to keep it and you could still afford the reduced payments.
Click to expand...

That sounds good for the owner or the person going into bankruptcy then.
 
I hate the idea, but if goes through, I would like a piece of it. I've only lost 55% of my home value since purchase.
 
Originally posted by: spidey07
Terrible, terrible idea. I mean I like it on the surface but it's the affects that are so bad. All I can see from this is home prices dropping even more which would drive down ALL home prices - having a death spiral affect.
Click to expand...

Perfect example of the old quip - "Government. If you think the problems we created are bad, wait until you see our solutions."
 
Originally posted by: FelixDeKat
I entered the banking biz in 1990 and left in 2008. The mere mention of the word "cramdown" would should shivers down anyones spine in our business since it meant a writedown of a borrowers loan balance to reflect the current market value of a home. This was usually ordered by a judge as part of a personal bankruptcy filing. While this seems sensible considering the huge prop value drops experienced in certain parts of the country, it actually is not a good idea.

This outrageous practice was stopped in 1993 by the Supreme Court. Now, its about to rear its ugly head again. Why is this a bad idea? There are several reasons, besides the fact that it encourages reckless lending and borrowing it is something that people who buy mortgage backed securities will have to price in when bidding for pools of securitized loans. This means higher rates for everyone. Yipee!

Ill take our area for example, which has actually done much better than the national average. I was looking at a home around June of 2008 priced at $325,000. Back when I first noticed the property back in 1993, it was worth $96,000. It was worth about $158k by 2003, then "exploded" in value along with every other property in Fort Worth with everyone getting gas well lease payments. It was priced in 2008 at $350,000. The current owner did completey redo the interior and spruced up the backyard, so I dont know how much they put into it, but the property listing was pulled at some point. According to Zillow the last reported value was $284,000.

Now assuming that property was purchased for $325k, the borrower fell into trouble (which does happen to everyone, nothing to be ashamed of) and now the property is worth $284k, guess who "gets it" in a cramdown situation? In less than 7 months you are now looking at a potential $41k+ loss.

Good idea or bad idea?
Click to expand...

This has future unintended consequences written all over it.
 
If you borrowed $250,000 then you need to pay that much back PERIOD. The fact you made a poor investment with your money has no change in what you owe.

also, I want to take exception to your statement that falling behind on payments is "nothing to be ashamed of". ITs exactly that sort of thinking that got us here. If you took out a loan you can't afford you SHOULD be ashamed. And more then just shame, you need to be held accountable.
 
Originally posted by: BrownTown
If you borrowed $250,000 then you need to pay that much back PERIOD. The fact you made a poor investment with your money has no change in what you owe.

also, I want to take exception to your statement that falling behind on payments is "nothing to be ashamed of". ITs exactly that sort of thinking that got us here. If you took out a loan you can't afford you SHOULD be ashamed. And more then just shame, you need to be held accountable.
Click to expand...

I agree and thats why I oppose cramdowns. If you get into trouble (job loss, business failure, extraordinary medical bills, etc), you shouldnt be ashamed about a situation that has put you out of control.

My point is that foreclosure should be the only acceptable method of handling the situation, or maybe even a shortsale if the investor and lender agree to it.

I think cramdowns will encourage irresponsible lending and borrowing. There is talk of a sunset proviso so hopefully this will affect only a small segment of borrowers and not be an ongoing problem.
 
Originally posted by: TheBloodguard
CNN

If this becomes a reality, the millions of Americans struggling with onerous loan terms can tell their lender their intention to file bankruptcy, and that alone may be enough to propel a loan modification. And, a new loan could help as many as 8 million Americans who are at risk of foreclosure this year, says Durbin.
Click to expand...

Sounds like it would only help those that have adjustable interest rates or irregular loan and facing foreclosure instead of the responsible fixed rate and 20% down type. Unbelievable that they keep rewarding the risky.
Click to expand...
And, that?s not the only promise of this proposal, according to Dodd, who says that the bill could put a floor under housing prices which have been circling the drain for months.
Click to expand...
WTF? They want to keep house prices propped up?
 
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