September 4, 2010

New Proposal on Mortgages

Mortgages and new plans by the govt

Congress needs to bring back the cram-down rule in the bankruptcy code for residential mortgages to allow values to correct the market.

One of the biggest legal devices dealing with mortgages,  that was removed from the bankruptcy code around 1998 or 1999 was the cram-down provision in chapter 13.  I also practice law.  This was a market driven device that worked during the last real estate crash.  You used to seen it used in condo situations.  However once the market got stronger it was taken out of the code.  It was also used less once values caught up throughh the market process. It is really a strange situation that now the banks end up being in a situation were they are the in between, especially because this is essentially an adversarial process. It also seems to cost more rather than re-establish real values.  The values we see are essentially based upon people buying payments because there was no money down at the time of purchase.  Overall it drove the cost up.  Low rates and no money down.  Values were based upon purchase prices.  Indexing values to interest rates going back to 1997 or 1998 will show the incremental cost increase, coupled with the decrease in interest rates (based upon the bond rates) and no money down purchases, sightly hire rates for non-conventional mortgages with out mortgage insurance.  Meaning 2003 with the 5 to 6 percent rates, no money down, yield spreads at 1 to 1 1/2 percent from bonds which is were the funding for the loans came from. 

Cram-downs in BK Ch 13 would reset values and move the market.  It would also allow people to catch up on arrears over 4 years. Once the market caught up to the overvaluation the cram down would not be used or could not be used.  

They still have values up there because there are no real comparable and realistic sales but now the down payments are at 20 percent.  So 20 percent is actually much more. 

The code still allows cram downs in most chapter 11 situations.

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