There is SO MUCH interesting on this site and in the TPM Cafe’s posts today…not sure this stripdown thing is at the forefront of people’s concerns, but….here are two more thoughts, relating to the economics of home mortgage stripdown and to the comparative treatment of second mortgages.
The long-term economic ramifications of allowing or not allowing stripdown are important, but I do not think they weigh against allowing home mortgage stripdown. Adam Levitin just posted on TPM Cafe about interest rates. Great post! What about that other idea out there that allowing home mortgage stripdown will dry up home lending. First, I doubt it. Second, maybe it is ok, even if it is true. If part of the goal is to improve the value and predictability of investments in these products, and to lend only to people who will likely pay the loan, more careful lending (and fewer loans) could be a good thing. In other words, it may indeed have been better to never have loved……That does not mean we shouldn’t help those who are in the bad loans. They may have spent all of their savings on a bad deal, and now be deserving of help.
Second home mortgages in Chapter 13? I am not sure but I think Prof. Scarberry is saying that under the current Chapter 13, borrowers can strip down the second home mortgage, but only if they can pay the whole mortgage off in the 3-5 year plan period. If a bill is passed that allows the primary home loan to be stripped down and stretched out, he argues, lenders will be treated less advantageously for second home loans. Prof. Scarberry feels this would be a problem, though I am not so sure. I’d like to see all these mortgage holders treated the same, but if we had to favor one over the other, I’d favor the creditor in the second home loan and the borrower in the primary home loan.
It seems indefensible that under current law, borrowers might have an easier time saving a vacation home than a primary residence. (I admit, most of the time, borrowers cannot pay the second home mortgage in 3-5 years anyway, but at least theoretically borrowers are more protected on the vacation home than the primary residence). That just seems wrong. (as Bob lawless noted a few weeks back….).
Again, if I had to choose between giving people a break on a primary home mortgage and giving them a break on a vacation home mortgage, I’d choose to give the break (and yes, to treat the mortgage lender less favorably) on the primary home loan.
But the main thing is…..The treatment of vacation or second home mortgages should not bear at all on what we do with the overall issue of home mortgage stripdown. I mean, how often is second mortgage stripdown an issue? Second home mortgages are rare in Chapter 13, are a small percentage of the overall home mortgage market, and do not play a big part in the current crisis.
I would just hate to see the tail wag the dog, in other words to allow current second home mortgage treatment (surely an afterthought in bankruptcy policy in any case), to direct our decision on how to treat primary home mortgages.
Home Mortgage Crunch: Is it Better to Have Loved and Lost?
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One response to “Home Mortgage Crunch: Is it Better to Have Loved and Lost?”
An initial response, with appreciation to Nathalie for continuing this interesting discussion:
One of the very prominent arguments made in favor of allowing strip down of a mortgage on the debtor’s principal residence (what I’ve been calling a “home mortgage”) in chapter 13 is that chapter 13 supposedly already allows strip down of vacation home mortgages. The argument is that it is wrong to allow a debtor to save a vacation home by way of a strip down of a first mortgage but not to allow the same for the debtor’s principal residence.
One of the points I’ve been trying to make is that such an argument should be given little or no weight, because as a practical matter debtors cannot strip down substantial first mortgages on vacation homes. The argument appeals to our sense of outrage that rich people with second homes can use bankruptcy in a way that others of more modest means cannot. But the outrage is unjustified because debtors cannot do it, as Nathalie seems to admit.
If Nathalie could convince those who agree with her to stop making such comparisons, I’d have a lot less to say on the subject.
It is true that Bob (Lawless) says debtors can do it under current law, which if true would be an argument of some weight. But even the proponents of home mortgage strip down, at least in the Senate, admit that stripped down claims have to be paid in full with interest during the chapter 13 plan, which means over a period of five years or less. The section-by-section analysis to Senator Durbin’s bill says that. And the only circuit court decision on point, Enewally, says it, too. And section 1325(a)(5)(B)(ii) flatly requires it, if the chapter 13 plan “provides for” the secured claim, which Enewally correctly held (in my view) is the case when a secured debt is stripped down. It must be the case if the interest rate is adjusted, as the bills provide for. And the holdings in the pre-Nobelman cases that allowed home mortgage strip down in chapter 13 suggest that a change in the monthly payment would be a change that would trigger section 1325(a)(5)(B)(ii). Those cases refused to allow the monthly payment to be reduced, but simply permitted the stripped down mortgage to be paid off early, which of course provides no help for a debtor who can’t afford the contractually required payments.
So far I haven’t been able to post a comment on the TPM Cafe web page, but there are several reasons for doubting that Adam’s (Adam Levitin’s) observations with regard to interest rates prior to the 1993 Nobelman decision should be given serious weight. One is the point made in the prior paragraph; strip down pre-Nobelman did not allow for a reduction in the amount of the monthly payments, which is the whole point of allowing mortgage modification under the proposed legislation. Another is that until the circuit decision in Nobelman was issued, there was no dissenting circuit authority on the issue; thus the effects of the availability of strip down under the decisions that had been rendered may well have been felt relatively equally around the nation, as lenders had to consider that a mortgage originated anywhere in the nation might be subject to strip down. There also is the question whether there were a substantial number of strip downs that either occurred or were anticipated (given the requirement that the monthly payments not be reduced). John Rao raised the question with me whether there were enough strip downs to affect the lending industry. I thought there were enough that occurred or were anticipated that the still shaky lending industry was being threatened by 1993 (not long after the s&l crisis), but John is making me take a second look.
Mark Scarberry
Pepperdine