CITI Supports Bankruptcy Cramdowns to Avoid Foreclosure
If you weren’t already aware of the power of the U.S. Government as an investor, CITI has agreed to support bankruptcy cramdowns to help homeowners avoid foreclosure.
Chuck Schumer was just on CNBC’s Fast Money, and he said that this provision would only be for mortgages that had already been made.
He also stated that “sub-prime borrowers are prime payers.” Well, Chuck, if you think this is just a sub-prime problem, you quit paying attention 10-12 months ago. Prime delinquencies have been outpacing sub-prime for some time now.
He went on to say that “Sub-prime borrowers are prime payers, they just got a raw deal.” Really? So, a person with a 580-620 credit score who got an adjustable-rate loan at 2-4 points below the going 30-year fixed rate with their qualifications got a raw deal? How, exactly?
Mr. Schumer ascribes to a “simple formula” which he referenced- you can’t fix the economy until you reach a bottom in housing, and you can’t reach a bottom until you fix the foreclosures and you can’t do that without the bankrupcty provision.
The experts seem to be saying that foreclousures will rise in 2009 not because of falling housing prices, but because of a weakening economy. Based on the work that I do every day in dealing with homeowners trying to avoid foreclosure, I would tend to agree. They’re not paying because they can’t afford the mortgage, or because they’ve had a financial hardship. Their default has nothing at all to do with the value of their homes. In fact, I speak with a lot of people who aren’t terribly concerned about the value of their homes, so much as they’re concerned about keeping it.
When asked what percentage of borrowers would be able to avoid foreclosure through this provision, he said, “Approximately 60-70%.”
According to the American Bankruptcy Institute, overall consumer filings increased by nearly one third last year to reach 1.06 million in 2008. Let’s assume that 30% of those who filed did so specifically to keep their homes. so knock off 318,000. The Joint Economic Committee was predicting 2 million foreclosures in 2009. 2 million foreclosures x 65% = 1,300,000.
That’s 2,042,000 bankruptcy filings in 2009. Granted, the year’s already begun, and it may take a few months to pass the legislation, much less implement it.
Nevertheless, how do they expect the bankruptcy system to acccommodate this case volume, when they’ve already had issues in dealing with double-digit increases for most of the last several years?
I guess that will be their problem to figure out… Congress usually passes mandates without worrying about the price of compliance.
So… 1,300,000 bankrupcty filings specifically for the cramdown provision to avoid foreclosure.
70% will fail, which means that at the end of the day, we will have fattened a lot of attorney’s wallets (which is fine, they’re just doing their jobs), yet just 21% of the homeowners who enter this process will avoid foreclosure and ultimately keep their homes.
Mr. Schumer keeps saying that “This won’t cost the taxpayers a dime.” While that’s technically true- tax dollars will not be used to fund this “solution,” it will ultimately cost taxpayers through the layers of fat this will add to the foreclosure process. Most importantly, because so many of these will fail, the losses to the investors (who do pay taxes) will be greater than they would have been without this plan.
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Tags: Avoid Foreclosure, bankrupcty, cram downs, cramdowns, foreclosure, Schumer