Bankruptcy Cram-downs to Stop Foreclosure
The solution du jour floating around in Congress is a proposed provision to allow mortgage cram-downs on personal residences through bankruptcy to stop foreclosure. Senator Dick Durbin has once again rolled out this proposed legislation. As usual, Democrats think it’s a stellar idea, while Republicans are outraged at the thought.There is a tremendous amount of confusion as to how this would work in practice. However, my goal here is not to write a treatise on bankruptcy cram-downs to stop foreclosure. Rather, I want to focus on how effective they would be in helping homeowners to stop foreclosure.
The key issue is this: mortgage cram-downs would be possible only for homeowners who file a Chapter 13 bankruptcy. And therein lies the problem.
Would you care to guess what the success rate is for Chapter 13 filings? Depending on whose numbers you want to believe, it’s 20-30%.
That means that 7-8 out of 10 borrowers who file a Chapter 13 bankruptcy eventually have their cases dismissed.
A .200 to .300 winning percentage is the kind of thing that gets coaches fired, and rightfully so.
20-30% survival rates are the kind of thing that lead patients to seek a second opinion- and with good reason.
If you had a serious health issue, and the doctor gave you 30% odds of surviving, would you jump right in with two feet, or would you “think it over” for awhile? Maybe you’d take time to “consider your options.”
The fact is, most people who file Chapter 13 do little–to-no homework before signing the paperwork. I suspect that in today’s environment, homeowners in distress will follow suit.
On that basis, I expect that if mortgage cram-downs are allowed in bankruptcy to stop foreclosure, they’ll be wildly popular.
At first.
Then, the homeowners will experience the vagaries of the Chapter 13 system and suddenly, things won’t seem so swell. Eventually, many more homes will be lost than saved through this provision.
The most ironic point is that while OCC Chairman John Dugan was “shocked” to learn the true loan modification failure rate, I suppose that everyone will be “surprised” (saddened? dismayed? “shocked” again?) when they find that Chapter 13 mortgage cramdowns do an even worse job when used to stop foreclosure.
At least everyone’s acting in a consistent manner. FHA Secure was supposed help a few hundred thousand borrowers stop foreclosure. In the end, it reached about 10% of its goal. The Economic Stabilization Act of 2008 was advertised as being able to help 400,000 borrowers to stop foreclosure, and of course we can see how that has fared. Now, we come to cram-downs, which has the best chance of passing, what with the House, Senate, and Presidency controlled by the same party. Nobody’s even using any projections anymore as to how many homeowners this will help to stop foreclosure. Based on the prevailing discussion, It’s almost a “given.”
We’ll see.
I suspect the failure rate will be higher than that of loan modifications.
When you watch these discussions and see what’s proposed as a “solution,” you begin to wonder if anyone really wants to solve problems, or if they’re just looking for a quick fix that will make them look good for having done “something.” Politicians keep talking about “stabilizing home prices” as if they can do anything about it. I suppose they’ll be controlling the weather next.
Perhaps they understand, without admitting it publicly, that there really is nothing they can do. Measures like these seem to be more effective in “kicking the can down the road.” If their main focus is simply to ease the slide or slow it down, this may do it. The backlog alone will impose a de facto “foreclosure moratorium,” so foreclosures will fall, temporarily.
In the end, this will help significantly fewer than expected, give false hope to many, and ultimately compound the losses to mortgage investors, as the can gets kicked down the road, and housing prices fall further.
Gridlock, anyone?
If you enjoyed this post, make sure you subscribe to my RSS feed!
Tags: Bankruptcy, cram downs, foreclosure, mortgage cram-downs