While Summers' policy suggestion can be the subject of argument, I doubt he's confused. Bankruptcy works the way Congress says it works.

And if to get lenders on board, to avoid Constitutional issues, and most importantly, to avoid disputes over valuations*, Congress decides to keep the "deficiency" alive post-cram down, why not?

* The dispute over "cram-downs" is over the fair market value of the property which is always based on opinion. But if lenders know that on sale of the property the "deficiency" will be paid to the extent that there are sales proceeds sufficient to make the payment, they'll be a good deal less likely to raise a fuss, initially.

I have had some interesting luck just waving at a foreclosing bank the possibility that the mortgagor would quitclaim to a corporation which would then seek relief as a debtor in possession under Chapter 11.

The flexibility which apparently recommended itself to the local foreclosing counsel led me to believe that they perceived the bankruptcy court as a far less favorable venue for them than superior court.

On the same topic, it has seemed to me that a nolo press type of do it yourself chapter 11 could be produced, based upon the incorporation or merely the establishment via partnership, of some business entity eligible for a federal tax id number.

Ma and Pa Kettle open a Bed and Breakfast, as it were, and the next day they file their do it yourself chapter 11.

Everyone knows it's better to be a chapter 11 debtor in possession than a chapter 13 slave to the trustee.

Except that certain borrowers were investors who worked with originators who used favored appraisors to pump up values to get loans for more than 100% LTV given real market value given real world assessment of risk. In a up market these guys coined gains using other people's money, now they want to use the bankruptcy courts to hide profitable past mortgage fraud. Well I cry bullshit.

I own a mortgage lending business and am pretty up on what is going on. A couple points. Mortgage lending is based upon the idea of foreclosure as a way to recover assets, in the last 2 years that idea has been turned and is now no longer compatable with reality. One case I know of in South Florida is of a house that was bought for 671k in early 2006. The owners went into default within 6 months, and the house was foreclosed upon, in a foreclosure, the bank will usually buy back the house up to the amount owed on it, in the hopes that real estate will rise in value and they will be able to break even in the transaction. In this case the house was foreclosed, bought at auction by the bank for the 671k they owed on it, and sat for months unsold as the real estate market imploded. The bank that owned this propert actually went bankrupt which put it's assets on hold for several months as house values continued a downward trend. In the end it was auctioned again and sold for 540k, a loss to the bank of 131k in real cash, plus 18 months of taxes that they had to pay of about 15k, and interest of about 19k. That is a huge loss. And this story is replayed all over the country in many markets.

The banks lose big in this, the guy who bought a 100% LTV house and made payment for three months, then sat in the house rent and mortgage free for 6 months while in foreclosure does no bother me at all. The banks are losing big and need the protection. The bill should go forward and be passed, but there are many within the big banks who cannot accept the idea that they made poor lending choices and will not get thier investment back are rampant. Leaving the decision in the hands of a foreclosure or bankruptcy judge is a risk that will produce many bad judgements, but it better than the other option. The invisible hand of the market is currently giving the lending industry the finger. Can you see it?

Several years ago I conducted hundreds of foreclosures for a couple of major banks, and the case RE outlines was a very common situation. The banks weren't anxious to foreclose and then have to pay taxes, maintenance and resale costs and then lose money. It took many months for the banks to decide to foreclose (after trying to make accomodations with borrowers), and months to complete the process, and most of the time the borrowers were making no payments at all.

So, truly, I did not have any sympathy for the couple that had been living in a house for 18 months for free, had been through a complete foreclosure process with all proper notices and such, had refused to vacate and forced us to undertake a summary eviction process, then called me up the day before the eviction and said they needed a couple of more days so they could scrape together first and last months' rent and find an apartment. Then they stole the hot water heater, stove and floodlights from the house on their way out the door.

That having been said, those were the old days with foreclosing banks that had also been the originating and servicing institutions for the mortgages. One of the problems with mortgage securitization (on top of the games played by the rating agencies and other Wall Street players) is that the servicers have little desire, incentive or authority to review the circumstances of individual loans and make rational decisions about how to manage "non-performing assets."

The "safe" option for servicers (and perhaps the only option they are given under the agreements which appoint them) is to proceed with the foreclosure, even if the more rational economic decision would be to lower interest rates, stretch payments, accept interest-only payments for a while, etc. Nobody in the system is likely to question the foreclosure, while a workout arrangement (a certain number of which will still ultimately end up in foreclosure) exposes the servicer to second-guessing. If you don't get blame for one action and won't get credit for the alternative action, which do you choose?

Anyway, IMO that is why "jawboning the lenders just isn't working." I'm a supporter of free markets, but the system here is just too distorted to encourage economically rational decision-making. No lender in their right mind could think that waves of foreclosures make economic sense--why would they want to own lots of homes in a down market?

I'm okay with Summers' proposal. Given a cyclical housing market, why shouldn't the lender, instead of the homeowner, get the benefit of a recovery that might take place within just a few years. It does seem equivalent to giving equity interests to unsecured creditors in a business bankruptcy reorganization.

Dancing Bear,

I think you hit on a point most people do not understand. The bank that you send your mortgage payment to in most cases is not the place that holds your debt. Mortgages are broken up and sold off in packages as investments to foriegn investors, retirement plans, and numerous other investment vehicles. The idea of foreclosure and the reason it has worked in the past is that both parties had a vested interest in making sure that the payments kept coming in and the house remained in the owners hands. Currently, the servicing bank does not usually have a stake in the debt on the house, that risk is borne by investors. The owner might have paid little or no money down so there is no vested interest, infact, quite often they owe more than the home is worth. So why worry about foreclosure, the borrowers do not have a stake in the process, and neither do the banks.

By the way, i know this is just one example in the "south florida swamps" that I pointed out, but infact there are tens of thousands of these homes in south florida in the same situation, and the condos are even worse. California is just as bad if not worse, as is most of the urban midwest like detroit and chicago. House prices are dropping just about everywhere, so unless you live in an area that did not have a sharp rise in the last 7 years, your market is probably falling as well.

The south-florida-swamp anecdote is not that far off from what I've seen (relatives who bought a repo house, living in Houston in the 1980s). Banks don't do foreclosures very well, and they do a terrible job of reselling the property after the own it.

Yet another possibility, one that is likely to be pursued only after foreclosures become clearly a bad idea, is selling the loans (at a loss, of course, but perhaps less than a foreclosure loss) back to local lenders, who will have autonomy, flexibility, local knowledge, and the ability to call the sheriff to track down that stolen water heater.

By the way, that jerkwater bank you were talking about was a national lender that closed 18.3 billion in mortgage loans in 2006, had 1900 employees and 41 locations nationally.

I guess if that is your idea of a jerkwater bank, your critique is justified.

Elizabeth Warren for Vice President!! (Or at least Treasury Secretary...)

But seriously, the severity of the predatory lending & consumer debt problem can not be understated.

Credit Card companies are the new tobacco companies - ripe for a class action. There's definitely a smoking gun memo out there depicting their plans to trap people into debt for life. Somebody please find it and leak it.

1) Cynically mining college campuses, and 2) ruthlessly preying on individuals emerging from a bankruptcy. This makes up just the tip of the iceberg.

This is usury folks. The industry is designed to create a nation where those making below $100,000 are essentially indentured servants to their debt burdens.

"It will take 60 votes to push the bill forward."

Okay, this has finally put me over the edge. When will the Democrats make the Republicans'use of the fillibuster an issue!? Remember how the Republicans found a way to successfully make the Democrats ashamed of using this "procedural gimmick" (I think that is what they called it). Yet another example of how our leadership just stinks at the game of "playing politics".

My house was foreclosed on seven years ago since that time I have not been able to even put together the money required to take bankruptcy so I - from a totally personal point of view, not from statistics - know of which I speak. My comment is meant only to express my opinion, not to be a treatise on the economy.

While there are worthwhile provisions in this bill, I am in total disagreement with lowering a mortgage to its current market value as opposed to its original mortgage value.

I do not want anyone to lose his/her home. I do not want the value of homes to fall for those people who own homes they can afford and on which they are making payments; however, I have limited sympathy for those - like me - who were less than smart in their choices. Unlike many, I made a substantial down payment, had made on time payments for more than three years and was a victim of substantiated fraud in my last refi. Still, the outcome was almost entirely due to my stupidity and greed.

Those people who bought way more home than they could afford, who paid little or nothing down, who have made very few payments and/or did not make sure they understood their mortgage terms need to face up to the problems they have made for themselves. If a person is old, sick or the victim of fraud (by this I do not mean he/she just didn't read the terms of his/her ARM) then he/she should receive as much help as possible.

While many banks were party to the credit and debt that led to the current problems, so were most of the home buyers. Most banks will work with a homeowner who can afford the home he/she has bought. I do not understand why people who bought at the height of the bubble should be given any more relief than those who bought at the height of any bubble. Play the game, take the chance.

http://strictlyanecdotal.com/2008/02/11/there-should-be-blood.aspx

Don't feed the trolls.

This morning I read a column by Summers at FT.com on his foreclosure remedy. It said the following:

"First, remarkably, bankruptcy laws currently provide that almost every form of property (including business property, vacation homes and those owned for rental) except an individual’s principal residence cannot be repossessed if an individual has a suitable court-approved bankruptcy plan. The rationale is the prevention of costly and inefficient liquidations. It is hard to see why similar protections should not be prudently extended to family homes."

The link is here: http://www.ft.com/cms/s/0/471e6794-e2e7-11dc-803f-0000779fd2ac.html

Informed readers will recognize this as a complete misunderstanding (or mistatement) of current bankruptcy law, which allows debtors to avoid foreclosure but NOT TO CHANGE THE TERMS OF THE LOANS ON PRINCIPAL RESIDENCES. IMO, such a grand misunderstanding disqualifies him from claiming any expertise on the issue whatsoever.