Firedoglake is sounding the alarm about the “New Democrats”, many of whom are still taking their marching orders from the banks who have brought us to the brink, if not into the vortex, of disaster. In this case, the chief villain is Congresswoman Ellen Tauscher, a former Wall Street investment banker who is carrying water for her old industry (and is being well paid in campaign donations for it) by opposing bankruptcy reform, particularly the Obama administration’s proposal that consumers be allowed to cramdown their mortgages.
This hits a bit close to home because, according to Firedoglake, one of the “New Democrats” is John Larson, whose district is one of those hardest hit by the wave of foreclosures. It’s difficult to see why anyone would carry water for the banks in this climate, but a guy like Larson doesn’t have to worry about re-election, and the issue is just arcane enough to make it hard for people to understand. In addition, it’s easy to blame the victims whenever you are discussing bankruptcy.
You may be asking: What’s a “cramdown”?
Broadly speaking, there are two kinds of debt in bankruptcy, secured and unsecured. A debt is secured if the creditor has a contractual right to seize the debtor’s property in order to get repayment. When you buy a car, the creditor can repossess it if you don’t pay, because the loan you took out is secured by the car. As we all know, if you don’t pay your mortgage the bank can foreclose and sell your home to get its money.
Unsecured debt is secured only by your word. If you don’t pay, the creditor can sue you, and then pursue whatever legal avenues are available to collect its money.
In a bankruptcy, security interests are honored. If you are a secured creditor you have the right to get the secured property and sell it if you aren’t being paid. Unsecured creditors often get nothing, or next to nothing, from a bankrupt. Their debts are often “discharged”, another word for wiped away.
Issues arise, however, when the value of the property that is subject to the security interest is less than the amount of the debt. For instance, if I owe $150,000.00 on my mortgage, and my house is only worth $100,000.00, for all practical purposes the bank with a mortgage is secured to the amount of $100,000.00, while the balance is unsecured. A cramdown lets the debtor take advantage of that reality, by allowing him or her to treat only the $100,000.00 as secured debt. The bankruptcy judge can impose terms on the bank, requiring it to accept a payment plan that pays it the $100,000.00, while treating the remaining $50,000.00 as unsecured debt. That would mean, in most cases, that the $50,000.00 debt would be discharged, and the debtor could keep their house by paying only $100,000.00, the amount it is worth.
Cramdowns are already allowed for automobiles and vacation homes, among other things. But Congress, displaying the wisdom only lobbyists dollars can bestow, barred the procedure in the case of primary residences. Given our current economic situation, it makes good sense to allow cramdowns for primary residences. But, operating on the assumption that only they should get free money, the banks oppose it, and so do the New Democrats.
Bear in mind that if done properly, a cramdown preserves one hundred percent of the protection the banks have a right to expect. Were they to actually foreclose on the property, they would get what the court allows in the cramdown, less the often high cost of the foreclosure. Given the current situation, legalizing cramdowns would quite possibly be in the bank’s best interests, because it would maximize their return on these mortgages, at the least cost to them. By stemming the tide of foreclosures the cramdowns would also have the effect of stabilizing property values at a higher level than they would fall to if the same houses went into foreclosure.
It’s mystifying that Larson would be against this common sense measure. The fact that, at present, one debtor can save a vacation home, while another cannot save the only home s/he has, speaks volumes about the current, punitive, class based animus in the bankruptcy code. The “reforms” that were passed a few years ago took dead aim at the working and middle class and scored a direct hit. The current crisis is a golden opportunity to undo the harm done by the Republicans (assisted by a number of Democrats) a few years ago.
