Thursday, February 19, 2009

"Cram down" Rights for Consumers

Bankruptcy Help (from Bloomberg)

Loan modifications will be combined with a push for more authority from
Congress, including a proposal that would let bankruptcy court judges cut loan rate for borrowers, the person said. The Obama administration also wants to permit modifications on Federal Housing Administration and Veterans Administration loans, which currently can’t be changed.
Community groups support efforts to let judges cut mortgage rates for borrowers in bankruptcy, a provision that the banking industry opposes. Investors have said this provision could cripple the secondary mortgage market and raise interest rates for all borrowers.

During all of last year, more than 2.3 million homeowners faced foreclosure proceedings, an 81 percent increase from 2007, and analysts say that number may soar to as much as 10 million in the coming years.

President Obama’s plan to help homeowners includes loan modification powers for Freddie Mac and Fannie Mae mortgages. There has already been a push by some for more tools within consumer bankruptcy cases.

There is a lot of resentment in the business sector toward the “cram down” option that many consumer advocates want to see given to homeowners. Businesses get to take advantage of that power in Chapter 11 cases. Homeowners want it. The trick is finding a way to help those who need it without opening the door for abuse. What is the solution?

Homeowners should have access to this tool within a Chapter 13. To prevent abuse and unfairness, though, why not set some criteria such as:

1) Relief must be approved by the court
2) Homeowner must not be at fault in causing the devaluation
3) Debtor must be paying as much as reasonably possible into the plan for the maximum plan duration
4) Unsecured creditors can receive no payments until the secured creditor is fully paid according to the plan
5) Value adjustment cannot be below the total of (a) present appraised or stipulated value and (b) sum of payments to the lender under the plan
6) Discretion should be available in the court to grant partial relief where the property value is reasonably expected to recover over the life of the
debtor’s expected occupation of the property, so that the stripping down is not all-or-nothing relief; this could be in the form of other loan modification reasonably expected to give similar cash flow relief to the borrower such as interest rate reductions.
7) In cases where the loan originator is shown to have created, caused or substantially contributed to the problem, then the present holder of the debt should be given far less consideration, but allowed to pursue its contractual remedies against those upstream on the loan without
needing relief from stay (or by getting it within the plan confirmation
8) This “cram down” right should be an expiring one, targeted to
end with new cases that are filed on or before December 31, 2010 by debtors who have not had a completed bankruptcy within the past 3 years.

Bankruptcy cases do not need to become more complicated (and expensive), but some constraint is needed on requiring evidence that a judge and trustee can review to decide whether the cram down should be granted.

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