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The Cram Down Myth


*Disclaimer: nothing in this post should be construed as legal advice. If you think bankruptcy might be right for you, you should consult with an attorney. Your state bar association will be able to refer you to an attorney licensed to practice law in your state.

“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.”
Ernest Hemingway, The Sun Also Rises

The image of the irresponsible debtor dripping in diamonds, driving around in a flashy car and burning money while nonchalantly filing bankruptcy is a stereotype created by the credit card and banking industries to guilt middle class Americans into thinking of bankruptcy as some shameful act to be avoided on pain of death instead of what it is: a financial planning tool. The vast majority of people who file bankruptcy are honest, hard-working people who paid their bills on time and never dreamed of filing bankruptcy until . . . until that devastating illness kept them out of work for 6 months, until the insurance coverage turned out to be inadequate, until the divorce, until the factory closed, until, until, until. No one is immune.

The law recognizes that sometimes unforeseen, uncontrollable events can lead a consumer to accumulate unmanageable debt that can ruin their lives. For this reason, the Bankruptcy Code was written: to provide the honest but unfortunate debtor with a fresh start. Yet, every single person who walks through my door for a consultation ends up crying in my office. They have spent months without sleep stressing out about how in the world they will ever pay down their overwhelming, soul-crushing debt. Often they have been working two jobs trying to make ends meet. They have been robbing Peter to pay Paul in the hope that something will turn up to enable them to catch up on their bills. I am their last resort and they know it, or they would not have come to see me.

And still they do not want to file bankruptcy. Still they hope against hope that I will be able to tell them that that there is something (anything! can I sell my kidney?) else they can do other than filing bankruptcy. Anyone who expects me to tell the 60 year old hair dresser with no insurance and $100,000 in medical bills from her double-mastectomy who walked into my office a year ago to work until she is 90 and go without “luxuries” (like food) so that she can pay that debt because it is the “responsible” thing to do can just stop reading now. And I suggest you avoid my future posts as well.

Recently, talk of authorizing bankruptcy judges to cram down principal residence mortgages gave the banking industries hacks an attractive opening to gin up propaganda and rile the masses into breaking out the pitchforks and condemning those “irresponsible borrowers who bought more house than they can afford.” What people like Santelli et al are not telling you is that cram downs were allowed until 1993 for principal residence mortgages and are still used all the time in bankruptcy law, especially business chapter 11 (repayment plan) bankruptcy. I don’t hear Santelli yelling about those irresponsible corporations that bought more heavy equipment than they can afford. It is only the consumers who must wear scarlet “Bs” for filing bankruptcy.

In my next post I will explain the differences between the two types of bankruptcies available to consumers: chapter 7 (liquidation) and chapter 13 (repayment plan). For now, here is what you need to know about cram downs. When the amount of the debt is greater than the value of the collateral securing it, the bankruptcy judge reduces (or “crams down”) the value of the secured debt to the value of the collateral. The remainder is treated as unsecured and is subject to the same repayment terms as unsecured debt. Because a plan payment is a prerequisite for cram downs, they are not available in a chapter 7 bankruptcy.

In a chapter 13 bankruptcy all secured creditors, except the mortgage lender on a principal residence, can be subject to a cram down. In a chapter 11 bankruptcy all secured debts are subject to a cram down. In other words, a corporation that owns an office building worth $100,000 secured by a $150,000 mortgage can file a chapter 11 plan wherein the mortgage is paid in full in the amount of $100,000 and the $50,000 remainder is paid as unsecured debt; that is, on a pro-rata basis according to the percentage terms of the plan. When the plan is completed (either over the course of 3 or 5 years) the unpaid portion of the unsecured debt is discharged. However, a homeowner whose principle residence is worth $100,000 but is secured for $150,000 does not have the relief of a cram down available to him.

Allowing cram downs on principal residence mortgages will help consumers who want to stay in their homes, and who can show they have the ability to pay both their mortgage and plan payment, prevent their homes from going into foreclosure. Now if you are cold, dead and shriveled up inside, you can take a hard-line against these people about what they should have done but that doesn’t change the fact that whatever mistake they made getting that house in the first place helping them keep it now helps the rest of us in that the housing market will stabilize more quickly. And contrary to popular (or propaganda) belief, this is not a “give away” — it is 5 years of hell being in a chapter 13.

The prohibition of court-ordered modifications for mortgages on principal residences was created in 1978. Between 1978 and 1993 most bankruptcy courts interpreted the law to mean that while interest-rate reduction or term-extension modifications were not allowed, home mortgages could still be crammed down. In 1993, with Nobleman v. American Savings Bank, the Supreme Court held that the prohibition on modifications of principal-residence mortgage loans also included cram downs. The result is that borrowers whose homes are worth significantly less than what they owe on them and/or who have toxic, high-rate mortgages are, for all practical purposes, unable to maintain their homes in chapter 13.

During the discussions leading up to the Bankruptcy Reform Act of 2005 (Public Law No. 109-8, 119 Stat. 23, April 20, 2005) (“BAPCPA” or, as I like to call it, the credit industry’s dream bill), the bankruptcy bar and consumer groups attempted to persuade Congress to allow cram downs for principal residence mortgages, thus legislatively overturning Nobleman v. American Savings Bank. The banking industry hacks (who had a lot more money to spread around than the consumer groups) argued that allowing judges to actually value homes at market price would destabilize the mortgage backed securities market and hinder the ability of thousands of Americans to get an affordable mortgage. The gist of their argument was that because home mortgage lenders provided a vital social service, they should be treated differently from every other lender in the world.

Now I might have been sympathetic to that argument if I grew up under a rock. Think about what we actually got by giving home mortgage lenders special treatment by completely eliminating the possibility that any loan they made could be restructured in a chapter 13 bankruptcy. On the one hand, post-1993 era lenders made low- or no-money down loans at interest rates that were slightly lower than what they would have been if the lenders had feared bankruptcy court restructurings. But we also got no money down 100% financed homes where borrowers were allowed to “pick their payment.” We got “no document” mortgages, where consumers were given loans without having to provide proof of income and without even a pretense of credit history review. We got appraisals that were not worth the paper they were written on. We got ridiculous housing bubbles that were begging for someone to come along with a big sharp shiny pin.

And while the lenders were lavishing obscene bonuses on each other, propping up those insane housing bubbles and celebrating the “go-go” days of the sub-prime mortgage, it turned out that a lot of those people they were providing a “vital social service to” could only “afford” those homes for two or three years. Make no mistake — the only reason the banking industry is continuing to oppose cram downs is because even though the house of cards they engineered and built is crashing down, they don’t want to look even more insolvent than they already do. Lenders have some serious karmic smack downs coming to them, and bankruptcy judges are the perfect ones to do it.

Banking industry hacks yammer on about the “moral hazard” of allowing consumers to cram down their principal residence mortgages. Setting aside the sheer lunacy of anyone in the banking industry talking about “morals,” the reality is that if lenders were faced with having their loans restructured in chapter 13 via a cram down, they will start doing what they should have been doing these past ten years or so: model negative HPA in their ratings models, start getting realistic appraisals and *perhaps,* if a loan does get into trouble, decide that it might be better to work it out directly with the consumer rather than risking the bankruptcy judge telling them what they will accept.

The bottom line is that the possibility of the cram down being used to restructure principal residence mortgages is one of the most valuable “sticks” society can have to put a check on lender stupidity, negligence and down-right thievery. The late Doris (Tanta) Dungey at Calculated Risk summed it up best in 2007:

“Any industry that wants special treatment under the law because of the socially vital nature of its services needs to offer socially viable services, and since the industry has displayed no ability or willingness to quit partying on its own, then treat it like any other partier under bankruptcy law.”

Dungey hit the nail on the head. I only add that not only is allowing cram downs of principal residence mortgages the equitable thing to do, it will help the economy more than anything in the stimulus bill and will cost the taxpayer a lot less to boot.

153 Responses

  1. Hi Angie,

    Great post! I’ve been wanting you to write about this stuff for a long time.

    Hi bb!!

  2. Wow! angie, you hit a bullseye! Congratulations on your first post! Terrific!!!

    • Thank you Pat J! I seriously recommend that you start putting together a book of your writings — bb is right — you are a new Erma Bombeck (but funnier).

      • Anyone who can work Clifton Webb into a post about a wedding shower is my kind of writer!

      • Terrific Post, Angie – looking forward to you posting more!!! 😀

    • An absolutely excellent post. Given the mindless drivel that passes for political and economic discussion elsewhere in the blogosphere, it’s always a pleasure to come here to The Confluence and see really thoughtful posts by people who actually know what they’re writing about.

  3. Angie … fantastic post! It’s great to see you writing here.

  4. This is such an educational site! Great post, Angie, thanks; helps me understand more of what’s going on.

  5. It’s kind of like the welfare cheat myth, isn’t it? They always screw the little guy. Like that guy down in FLA who wants to drug test the unemployed.

    • Exactly bb — of course there are always someone somewhere who “cheats” the system — but the vast majority do not.

  6. Woo hoo–angie’s in the house, postin’ on the Front Page!!

    I had to exult, now I’ll go back and read the whole thing 🙂

  7. I like this:

    And while the lenders were lavishing obscene bonuses on each other, propping up those insane housing bubbles and celebrating the “go-go” days of the sub-prime mortgage, it turned out that a lot of those people they were providing a “vital social service to” could only “afford” those homes for two or three years. Make no mistake — the only reason the banking industry is continuing to oppose cram downs is because even though the house of cards they engineered and built is crashing down, they don’t want to look even more insolvent than they already do.

    That’s all it’s about–protecting the bloodsucking bankers.

    • Exactly bb — the “vital social services” b.s. is a smokescreen — really, how can you argue against that? The truth is what it always is — protecting the money men.

      • IIRC when PG&E filed Chapter 11 around the time of the Enron meltdown they argued successfully that they had to pay executive bonuses.

        They couldn’t pay their debts but they paid the important stuff.

        • myiq do NOT even get me started on Enron. My stepmother worked there (pink-collar work), was of the age where she wasn’t allowed to divest those stock options, and now she and my dad will basically never be able to retire. They are HOPING for a double-wide in a cheap area. Grrr.

  8. Quote of the day from Falstaff:
    How seriously can we take an Administration that didn’t even know about the AIG bonuses — and that then makes lame excuses about how its hands are tied, until being shamed into action by public outrage? How seriously can we take an Administration that trails behind ordinary citizens in its understanding of the basic political realities of the moment?

    Leadership means being out in front of major problems, not scrambling to assume the right stance after the fact. Leadership means taking those problems seriously enough to be fielding a complete team, with a really strong game plan. (Many major positions at Treasury are unfilled? Say what? Would it be tolerated to send our troops into battle without a fully-staffed command operation??) Leadership means having the political skill to understand and address the public’s fear and its outrage — including a recognition of the kind of political dynamite that all these bailouts represent.

    Not ready on Day One, not ready at 3 a.m., not ready, period.

    I’m still waiting for BTD to call Obama out the way Falstaff did today.

    • Don’t hold your breath….

    • This administration reminds me of the thief who’s not at all sorry he robbed someone, but he’s terribly sorry that he got caught.
      If the information about AIG bonuses hadn’t gone public do you think Obama would be on his soap box denouncing them today?
      And even in the wake of the grandstanding, Opologists are trying to soothe us by saying that AIG is “contractually obligated” to deliver that money. The implication is, of course, that we’re supposed to turn our heads and allow it to happen “this time” because now that Obama is on the case it won’t happen again. How many times will people believe that meme?

      And Angie — great post. Thank you for telling the truth about bankruptcy.

  9. I was interested in the use of “late’ to refer to Tanta. I checked the site and found her memorial there. Here it is if anybody else is interested:


    Age 47 – ovarian cancer

    Excellent explanation of cramdowns. Thanks.

  10. Muy excelente!

    I wish I would have stayed awake in BK class so could understand this stuff.

  11. Angie…question. In your experience how much does the baloon payment figure in to the equation? I wonder if there would be any good way to restructure the interest and payment structure to allow those that don’t want bankruptcy to keep there houses. For example what about the gov’t just refinancing at a low interest rate for 30-40 years fixed. Allow this for anyone who wants it It could only be on a principal residence. It seems that this could be easily done and the gov’t (taxpayer) would at least get back the interest that was charged, under the present system we get squat, unless you count the debt bill we are all accumulating.

    • that’s the problem native1 — I don’t have any experience with actually cramming down principal residence mortgages because they aren’t allowed. I have been able to get a cram down on some rental properties some of my client’s owned. And, of course, I’ve been able to cram down car loans. But in neither case have I dealt with balloon payments.

      • baloon payments aside, just your opinion, would just lowering the payments substantially help any of the people you are dealing with in bankruptcy or is it already to far gone?

        • Lowering payments or cramming down is not going to help everybody — it will only help those who can go forward and continue to make the new payment — so we are not talking about a cure-all. You know, for someone who has lost his/her job and has no income a lower payment is going to help — that person will probably have to file a ch. 7. But, lowering the payment or cramming down will both help a lot of people. The vast majority of people do not want to lose their homes. The advantage of the cram down (over just lowering payments) is that the “new” restructured loan will reflect the actual market value. Thus, at the end of the 5 year ch. 13 plan people will owe what their house is worth. The banks don’t want that to happen because their balance sheets will look even worse than they do now. But that will help the rest of us so much because going forward the banks will no longer go get those ridiculous unsubstantiated appraisals which created the bubble in the first place.

          • That’s just it. If they don’t get the houses down to the market value, these people are still going to be underwater and they aren’t going to build any equity in their homes. They might as well be renters.

          • O.K. thanks, you answered my question very well. Love the spirit you show in this post. Thanks for taking the time to write this up and share it with us.

  12. Angie, this is great stuff. I just thought of you today when a reporter called to ask if our students are taking BR classes in greater numbers to make themselves more marketable. A sad sign o’the times.

    • Sad sign o’the times indeed — I’ve already filed 2 petitions this week and it is only Monday! I’ve got appointments for 3 more before Thursday! (I used to file about 5 a month).

  13. Just because you’re a frontpager now doesn’t mean you can’t tell people to go cheney themselves.

  14. Way to go Angie! Great post. Congrats. Couple questions.

    1) Why are cramdowns ok for second residences but not primary ones.

    2) How do you tease out a single mortgage when it is bundled in mass, securitized, held and serviced by some larger mortgage trust or bank.
    3) Who do you advise pressuring on the legislation.

    • 1. Because cram downs are ok for any secured debt & always have been — the courts (and Congress with BAPCPA) made an exception for industry re: principal residence mortgages because they argued that they were providing a “vital social service” to enable people to obtain affordable homes — but as we saw, that turned out to be a bunch of b.s. — the bankers/mortgage companies just started doing no due diligence & handing out loans to everyone so they could repackage & sell them to get the big money. I’ve you’ve ever bought a second home you know that the standards are much stricter – there isn’t any “no money down” loans, etc. on a second home.
      2. I don’t know that is a problem — the actual mortgage on that house is recorded in the county deed’s office.
      3. Congress.

  15. Angie…sorry, I jumped the gun and went straight to questions. This is a great post and I agree with you for what its worth. I hope you continue to stand strong in your convictions on this issue. I’m with you all the way. Those that think only ner-do-wells or scammers will benefit from cram downs must not live even close to the real world. In my opinion if ONE worthy person is helped it is worth it.

    Disclaimer: I have a very good job, make decent money, and my job is reasonably secure. I do not begrudge one penny of my tax money that is spent. I always pray that every one of my tax dollars is spent wisely even though I know they all aren’t. I have faith though that even if it is a small amount, some of it is making some ones life a little brighter or more livable.

    Speaking for me only.

    • native1 — no apology needed! I thought your questions were good — I just wish I could answer re: the balloon payments.

      The main point I hoped to get across with the this post is that people like Santelli are being penny wise but pound foolish in arguing against cram downs.

  16. From Treacher’s blog:

    I’ve never cared much about Jim Cramer, but it’s “funny” how he didn’t become a problem for Jon Stewart until he became a problem for Obama.

    • Funny that.

    • Funny, indeed. Cramer is a bit of a buffoon and circus ringmaster, but he is generally on the side of the average investor.

      I can’t count the times I’ve heard him talk about how the SEC and sane regulation was the best thing that ever happened to the American middle class, because it leveled the playing field for small investors. Some people talk about him as if he were one of the uber-capitalist laissez-faire nutjobs, but he is not. He believes in protections and oversight, and talked about that LONG before it became an “issue”.

      He made some shitty calls and trusted the wrong people, but I don’t think he’s a bad guy. Annoying and often wrong, yes. Evil selfish bastard, no.

      • When it was announced that Geitner was the choice for Treasury, he was very critical of him because he said he was part of the problem. He spoke about that a number of times in November and December.

      • Hi WMCB! (((waving)))

    • Absolutely. If Cramer has been wrong all this time, why didn’t Stewart say something sooner? He only became anti-CNBC after Cramer and other CNBC hosts began to attack Obama. If Stewart’s job is to hold the media accountable, where was he for part of 2007 and all of 2008?

      • It is really all a part of their disengenuous effort to twist the populist uprising that is peeking out from under the mess the banksters have made of our lives, and turn it to their advantage. Its like the good looking chick that won’t have anything to do with the skeezer dude during the day, and then hooks up with him at night and says “don’t take it personal I don’t go out with you during the day… cuz you know how I really feel about you…” or insert analogy of your choice.

        They lie to our faces all day, and climb in the sack with the bastages that brung ’em at night.

    • excellent point.

  17. Thank you so much for this Angie! Great Post! I’ve been wondering about a lot of this!

    • You are welcome dakinkat — small return on all the great posts you’ve done that I’ve learned from! 🙂

      • i still think it’s ironic now that vice president biden has been put in charge of the middle class and their concerns that he’s mostly responsible for the horrid new bankruptcy law we are now stuck with that saddles so many folks struck by illness and tragedy and forces them into servitude

        i expect debtor’s prisons to be opened again. we imprison and shame the poor. we bail out and provide bonuses to the privileged

  18. Great piece, angie, and in understandable language, too!

    The problem sometimes is that we need to accept the fact that there ARE people out there who were utterly irresponsible, selfish, greedy, and tried to live way beyond their means. So?

    I think that we Liberals sometimes do our cause a disservice by trying to pretend or argue that the lazy-ass cheaters do not exist. Because your average person knows better, and can probably name a few that she/he knows personally. And Americans have a visceral reaction to “bailing out” Joe Sleazebag in accounting, who they know damn well lived foolishly high on the hog, while they were so careful with their debts.

    Again – SO?

    If one tries to argue that they are not out there, and that SOME of them might benefit from things like cram downs, no one is going to listen – they will dismiss you as a Pollyanna. We have to admit UP FRONT that yeah, a few of those people exist, and are part of the price you pay for the greater good for those who NEED the help.

    The point is that

    a) The freeloaders are not the vast majority, and
    b) Allowing a few “unworthy” to benefit is a small price to pay to get some real help to the (much more numerous) average struggling person and the future health of the housing market as a whole.

    • Exactly WMCB — there are always people who work the system — so what? they are not the vast majority.

      • Isn’t it funny how when we talk about bailing out corporations and banks, the argument is:

        “It’s an urgent need, so let’s make some HELP available, and worry about oversight of who benefits and how later on.”

        But when we talk about helping the little guy, it’s a no-go unless one can nail down and guarantee UP FRONT that not one single undeserving soul will benefit.

        • For decades the conservatives blamed the size of the federal budget on Welfare and other aid to the poor.

          Spending on welfare for the poor is less than corporate welfare although it’s hidden from sight – tax breaks aren’t listed in the budget.

          We give corporations tax breaks so they can ship our jobs overseas.

        • Some “undeserving souls” are more “undeserving” than other “undeserving souls”. At least it appears that way.

    • Generally speaking the kind of people you’re talking about will never get too far in debt because they’ll never get a good credit rating.

      Those are the people who file Chap 13 for a couple credit cards and the phone a utility company as their creditors.

    • A lot of those lazy n’er do wells are being bailed out by the government and getting big bonuses even though they ruined their companies.

      • I heard the former (in the old old days) CEO of AIG today say that retention bonuses were a part of the systemic problem, and not just at AIG. He thinks they should be done away with.

        He said in his day, there were no guaranteed contracts, no retention crap. “You either want to work for this company or not. You either want to stay or not, we either want to keep you or not.” Retention bonuses in and of themselves create incentive for poor performance, in his view.

        He has a point.

        • I say let the flippin a-holez walk, in a miff over not getting retention bonuses. I mean, where else will they find a job in the severely downsized fi industry???

    • That’s a great observation, people are people, we know what we see, what we live.

      I don’t know if I’m a “we liberal” or not, but I agree with the Constitutitional view that equal rights for all provides a scenario which government and business are obligated to somewhat, against their will, level the playing field.

      I’m a liberal, yet I have never argued that “lazy-ass cheaters don’t exist” although I might call them unmotivated, or sometimes a**holes.

      I haven’t called anyone or thought about anyone as a sleazebag, but it could be that a**hole is my version of it.

      Laws and regulations should provide protection both ways, so those who cheat the government to the tunes of houses, cars, vacations, etc deserve legal redress.

      And ALL of us deserve laws with teeth, so that the f***ing AIG’s of the world can’t hoarde tax money for obscene bonuses and suffer no consequences.

      • You’ll often hear conservatives express the idea that we have poor people because we have Welfare. The theory is we’re encouraging laziness.

        The problem with that idea is that we had poor people long before we had Welfare.

        • Just a lot more dead poor people, which is what some people want.

        • Speaking as a conservative, I don’t think this is true, but I do think long term dependency on welfare perpetuates the condition of poverty. There are entire communities whose lives are so thoroughly intertwined with the government that they cannot imagine ever starting a business or home ownership or anything like that. I believe in welfare as a temporary expedient to help folks get on their feet, regain their bearings and head back out into the fray.

          Poverty I’m afraid, will never be entirely eliminated as long as two of the great sins abound: greed and sloth.

          • Please allow me to agree with you wholeheartedly. For some communities, the old welfare system was poison. It was just generous enough to keep folks on it, but not generous enough to give them a shot at getting off it.

          • Obviously if you set up a system that allows Welfare dependency to be a permanent way of life some people will make no effort to become self-supporting.

            And there will always be some people who would rather cheat or steal than do an honest days work. Some of those people are rich and educated, like Bernie Madoff.

            BTW – When I said “conservatives” I wasn’t referring to principled and thoughtful people like yourself. I was referring to bloviating gasbags like Limbaugh and Gingrich.

  19. Oh good Lord! Obama is going to be on Jay Leno! Can’t he do some work for a change?

    • In short, no.

      • He’s getting itchy and shaky, because he hasn’t had his adulation fix in at least a couple of days…

    • i wonder if he will bring his teleprompter with him.

      • I know we are supposed to hate Rush Limbaugh but it is very funny that he prefaces most everything with “the teleprompter told Barack Obama to say……”

        • OMG! Does he really say that? No effing way! I love it!

        • sad but true sad but true

        • The only talk radio I can get out here in the sticks is Rush and Hannity and they are banging away at him like a pinata. Rush is absolutely hilarious about it and NEVER misses the teleprompter joke.
          I would have never imagined that this former california liberal would have ever ….
          A- EVER listenend to those two
          B- laughed alot or
          C- sometimes agreed with them.

          Scary new world.

  20. “And still they do not want to file bankruptcy. Still they hope against hope that I will be able to tell them that that there is something (anything! can I sell my kidney?) else they can do other than filing bankruptcy.”

    Angie! Magnificent debut! I look forward to reading many more of your posts.

    The above quote is very interesting to me. I’d like to hear more, at some future point. It sounds like your job is a challenging one indeed.

    • Thanks alice!
      I love my clients — I totally hold their hands the whole way through because they are always so worried & scared about the whole thing (as well as ashamed). But I have to admit — I LOVE sticking it to the credit card companies. 🙂

      • I hope I am never in the position of your clients, but if I am, I want you in my corner.

        • I hope you aren’t either — I wouldn’t wish it on anyone but it really is true that no one is immune — all it takes is ONE thing to go wrong & it snowballs. “There but for the grace of God go I.”

      • Angie, what a wonderful person you are in the way you care about your clients.
        Thank you for writing this piece.

    • Obama do your job in Washington–presiding– and quit campaiging. There’s a itsy-bitsy countrywide problem you need to see to and we need to see results not your running around the country looking like a fool.

      No more town hall meetings for you, buster!

  21. Here’s an interesting article on the impact of the recession in the upmarket areas of the UK:


    Can’t say that I identify with the lavish lifestyle (I wish!), but everyone’s feeling the pinch.

  22. Angie! Congratulations on your post! Thank you for your defense of those that need someone on their side.

    I know a few divorced women with children that would really appreciate this information and understanding.

    You are a powerful voice—keep ’em coming!

  23. Great first post, Angie. Congratulations!

    I agree that the victims of predatory lenders need to be rescued and not thrown out onto the street. What I can’t wrap my head around is, what happens 5 years later? Don’t we have a situation where some people are living in neighborhoods they will never be able to afford?

    I’m thinking of a family (there were a couple, actually) in my former neighborhood. One wage earner is a bartender and the other works at Walmart. When we first heard they were buying a house on our street, we couldn’t imagine how they could afford it. My husband, the accountant, insisted they must either have inherited wealth or they were dealing drugs on the side. Well, once they moved in and we got to know them we found out that neither was true. They were victims of a relative who was a mortgage broker and who landed them in a home they will never be able to afford.

    So now, even if they are rescued from drowning in debt because of their mortgage(s) how will they be able to continue to afford to live in that house? How will they be able to afford the taxes and the maintenance and still be able to feed their family?

    I’m not advocating throwing them out on the street, but I’m pointing out that bailing people out of their mortgages isn’t the end of it. These unfortunate people will continue to be victims as their marriage suffers from fighting about money, their kids suffer because they go to school with far more affluent kids, the neighborhood suffers because some of the houses will not be maintained. This is a mess of epic proportions.

    • Cram downs are not going to help everyone — not by any stretch of the imagination. We can’t save everyone but the cram downs will help some people who really can benefit in the long run.

  24. Very good article Angie.

    And of course the irony is that in the example you cited, had we had Universal Health Care, the poor 60 year old hairdresser would not have had those staggering medical bills for her double mastectomy and she would have never had to file for bankruptcy.

    • Yep — that is why I used her as an example. Medical bills are the number 1 reason for people filing bankruptcy.

  25. bb: Obama is also having a big St. Patty’s Party at the WH tomorrow. It’s just one big party…

    Did anyone comment today about Bernake’s sudden optimism re: the economy, saying the recession will end this year? Daki? Just a week ago, Buffet et. al. were saying we were going over a cliff.

    • It’s Sealy Posture Pedic Savings & Loan for me.

    • Everyone I know is saying we aren’t going to hit bottom until winter 2010.

      • From here on out when they say go left, I”m going right, when they say “bob” I’m going to ‘weave’ when they say ‘jump’ I”m going to lay down.

      • I understand there are still a lot of mortgages in the pipeline that will have to be reset in the next few years.

  26. great post ms angie ~ I always knew you were brilliant
    (though probably very kinky as evidenced by your infatuation with MyIQ)

    • brilliant & kinky aren’t mutually exclusive. 😉

      • so true ~ dated a few like that!

      • brilliant, kinky and brave.. hey I am infatuated with him and he’s never heard of me.
        Great post angie.Thanks for making it so clear.
        And I love
        “go without “luxuries” (like food) so that she can pay that debt because it is the “responsible” thing to do can just stop reading now. And I suggest you avoid my future posts as well. ”
        No one would dare to argue with you.

  27. Hi Angie! Excellent Post!

    I’m not a lawyer and I don’t even play one on TV, but that 2005 bankruptcy bill was as transparant as glass regarding these mortgage issues. I started thinking I was clairvoyant, until I realized I was just seeing the truth.

    • Hi SOD! Thank you!!

      BAPCPA was bought & paid for by the banking & credit card companies –they got what they wanted (bleed the middle class while lining their pockets).

  28. Ange: I only add that not only is allowing cram downs of principal residence mortgages the equitable thing to do, it will help the economy more than anything in the stimulus bill and will cost the taxpayer a lot less to boot.

    So why wouldn’t the Dems (the pretend Dems, not the real ones like HC who has been pushing for a housing solution all along) understand that this will actually work, and help the economy more than a stimulus. Are BO and Geithner really willing to further destroy the financial system to protect their benefactors if it will ultimately cost them their reputations? Nothing is more important to BO than his own success.

    • sadly fif, because almost none of the pols care about the middle class — we are there to serve them.

  29. By the way…love the lawyeresque disclaimer at the top. One of my best friends is a lawyer and even when he’s drunk, he prefaces his comments with that stuff!

    • That is because you can lose your malpractice insurance faster than you can say “jimminy cricket” because some one who thinks you are their attorney sues you for malpractice. (The laws are very, very client-friendly — if the client *thinks* you represent him, you do, unless you expressly say “I don’t represent you. I’m not giving you legal advice.”

      • Next time you can put it in fine print. Isn’t that what lawyers like to do?


  30. go angie!
    thanks for all the great info.

  31. Hold onto your wallets folks…they smell a few greenbacks still in our possession.

  32. Excellent post about the facts of life for so many people all around us. Our neighbors, or our colleagues – either where we work now or used to work, our friends and our family. The small business owner we buy our ice and milk from every day. The craftspeople and artists who we buy creative things from, and who enliven our lives. Our kids’ teachers. The fireman. The nurse. The cop. The bank teller.

    Thank you for writing this, yours is a very clear voice about these matters which we all need to know more about. Keep it up, I am looking forward to more from you AngieNC2!

  33. Angie, I never read a clearer, more concise explanation of Chapters 11 and 13, replete with the kind of real-world examples someone like me needs to have a confident grasp of it.

    I do have one question though. Your mention of “model negative HPA in their ratings models” zoomed past me. Do you have an example or detail to fill in the spaces for me? And is it feasible, or not, to legally mandate such models?

    • In mortgage lending HPA = Home Price Appreciation, which is the change in value of a single-family home. This number is calculated using the United States Office of Federal Housing Enterprise Oversight’s House Price Index. However, lenders having been widely over-estimating positive growth & not taking any negative-HPA (i.e., depreciation) into their models when they decide whether to approve a loan.

      • Should our laws be changed wrt the House Price Index, and/or how the Office is staffed? I raise the staffing issue because it has been a sore point at the SEC, where their enforcement branch apparently is staffed, or stuffed, with politically-connected lawyers, rather than with people like you and Elizabeth Warren.

        And (my 2nd question from my initial post) what about legally mandating lenders to include house value depreciation in their models? It would seem like a commonsense inclusion, since many of us learned, as children, that markets, umm, can seesaw down as well as up.

        • Sorry — I missed the second question! LOL Lack of regulation is def. a problem so I suppose it could be fixed with mandating lenders to include depreciation factors in their models, but then we would have to check to make sure they do (something that probably is more complicated than it sounds & would probably only come to light once everything goes to hell, like it is now). However, IF those loans were subject to cram downs, the lenders would factor in negative HPA on their own. Trust me on this one.

          As far as the staffing issue goes, I don’t know enough about it to tell you if that is a solution — I mainly see after people are in trouble & haven’t really considered the question you are asking here.

  34. Excellent post, Ange!!

    • North Dakota is doing great too. They have a budget surplus.
      I could probably get a job there, and it’s my birthplace. But I’m too old to deal with forty below in the daytime.

      • Indiana, West Virginia, North Dakota, and Texas all have a budget surplus.

        Come on down! No freezing weather at all here in San Antonio!

    • Speaking of the Palins, Nightline is traveling to Alaska to find out why Bristol and Levi split. I kid you not.

  35. Thank you everyone for the kind words — I really sweated & double-checked with other sources (like Calculated Risk) etc. to make sure I didn’t blow my debut!

    I’ll post more on the differences between ch. 7 & 13 next week (this week is too crazy to try to get something else in). But if anyone is interested in learning more now, please visit:


    It is a government website & it is very good.

  36. could someone delete my double post at 8:36…. and yeah Angienc, you rock!!

  37. An amazing and informative post angie. Thank you for taking the time to provide easily understood and specific info.

    The Confluence is necessary for my continuing education and sure beats any form of msm.

    What a talented group of folk that hang out here.

  38. Angie..

    Excellent post!! Between your expertise and that of Kat, I may have to start bookmarking Confluence with my business blogs (like Naked Capitalism, Calcullated Risk, and Big Picture) as well as with my political blogs.

    More, please.

  39. myiq, bb, kb — anyone putting up a new post soon? I can’t hang out here too much longer.

  40. Well that is it for me y’all. I’m going to bed.

    Love you for all of your support!!

  41. I love you, angie. It’s awesome that a supergenius like you is compassionate enough to use her powers for good.

  42. Angie, you are the bomb. 🙂 I am having flashbacks from law school, though, which are not entirely pleasant. I did not like this class. 😛

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