The Democratic stimulus package is chock full of…well…everything. From money for the National Endowment for the Arts to Honeybee Insurance to money to fight sexually transmitted diseases (now that’s stimulus), it certainly is far reaching, but not stimulative. I define “stimulus” as government spending that will directly result in concrete jobs. Some employer would have to hire someone to build a road or build a bridge or make steel to go into those types of things. In fact, the portion of the bill that is “stimulus” is less than 20% of the total, most of which would occur 2-4 years down the pike. The recession will be over by then.
Concurrent with the stimulus package is the pending approval of the 2nd half of the TARP program...an additional $350 billion. Hidden within both the stimulus and TARP programs is something called “cram down”. Let’s suppose that two years ago you were 30 years old and wanted everything now. So you bought a $500,000.00 with 5% down signing an adjustable rate loan recalculated annually. After the first year, your mortgage payment jumps from $1200.00/month to $1800.00/month. You can’t afford the increase. When you go to refinance, you discover that the value of your house has gone down, and is now only worth $350,000.00. You can’t make your mortgage payment, and 6 months later the foreclosure papers are in the mail. What will you do? What WILL you do?
Barack has the answer. File for bankruptcy, and have your loan modified. For those of you who have never experienced bankruptcy, renegotiation of loans is often part of the proceedings. When you sign a mortgage for a house, you sign two documents. The first is the note that says you owe the money. The second is the mortgage, which is recorded in the county records securing the note. If you file for bankruptcy, the note is eliminated, but the mortgage on the real estate remains. The bank forecloses on the real estate, and if it sells the real estate at auction for less than the note, the bank has no recourse against the owner as the underlying note has been wiped out. If the holder of the mortgage forecloses and the owner doesn’t file for bankruptcy, and the house sells for less than what is owed on the note, the owner is liable for the balance until he files for bankruptcy. Often times the holder of the mortgage and the owner will re-sign for the house after the bankruptcy proceeding is over, and the owner can stay in the house.
What Obama is proposing is that the bankruptcy courts be given broad power to force a renegotiation of the note and mortgage within the bankruptcy proceedings. The judge would have the power to force new terms on the holder of the note and mortgage. Included in this range of authority would be the power to lower interest rates, extend the term of the loan, and here is the kicker, the power to reduce the value of the note to the current value of the real estate. In the case outlined above, the bank would be forced to write-off $150,000.00. This is called “cram down.”
It shifts the threat of loss from the person who is buying the house to the entity that is lending the money. Isn't that a great way to force the banks to start lending again? The banks will protect themselves two ways: 1) increase the amount of the required down payment; and 2) undervalue the home for appraisal purposes. Most likely, it will be some combination of both. The bottom line is it will become much more difficult to buy a house.
In addition to the above, it penalizes those who have bought responsibly. If the beneficiary of the bankruptcy court’s largesse in the forced renegotiation of the mortgage and note sells the house within 5 years of the renegotiation, and the house sells for more than the renegotiated amount, the owner has to share the profits with the lender to “allow” the lender to recoup part of the forced loss. But after five years, the owner of the house gets to keep it all, even if the house goes up in value to what he originally bought it for. Take it from someone who watches real estate, eventually the value of the house will go up again, and happen rapidly. IT ALWAYS DOES.
Meanwhile, the rest of us who saved our money to buy our homes and bought what we could afford, are left to dangle in the wind. Bad behavior is rewarded once more by the nanny state. The irresponsible party stands to gain $150,000.00 at the expense of those who are trying to buy a house for the first time, those who bought responsibly the first time, and the shareholders of the banks, which generally tend to be seniors who bought the stock for dividend income.
While I understand the reasoning that everyone suffers when whole neighborhoods go into foreclosure, I think I would like for Barack to cram “cram down” where the sun don’t shine.
Concurrent with the stimulus package is the pending approval of the 2nd half of the TARP program...an additional $350 billion. Hidden within both the stimulus and TARP programs is something called “cram down”. Let’s suppose that two years ago you were 30 years old and wanted everything now. So you bought a $500,000.00 with 5% down signing an adjustable rate loan recalculated annually. After the first year, your mortgage payment jumps from $1200.00/month to $1800.00/month. You can’t afford the increase. When you go to refinance, you discover that the value of your house has gone down, and is now only worth $350,000.00. You can’t make your mortgage payment, and 6 months later the foreclosure papers are in the mail. What will you do? What WILL you do?
Barack has the answer. File for bankruptcy, and have your loan modified. For those of you who have never experienced bankruptcy, renegotiation of loans is often part of the proceedings. When you sign a mortgage for a house, you sign two documents. The first is the note that says you owe the money. The second is the mortgage, which is recorded in the county records securing the note. If you file for bankruptcy, the note is eliminated, but the mortgage on the real estate remains. The bank forecloses on the real estate, and if it sells the real estate at auction for less than the note, the bank has no recourse against the owner as the underlying note has been wiped out. If the holder of the mortgage forecloses and the owner doesn’t file for bankruptcy, and the house sells for less than what is owed on the note, the owner is liable for the balance until he files for bankruptcy. Often times the holder of the mortgage and the owner will re-sign for the house after the bankruptcy proceeding is over, and the owner can stay in the house.
What Obama is proposing is that the bankruptcy courts be given broad power to force a renegotiation of the note and mortgage within the bankruptcy proceedings. The judge would have the power to force new terms on the holder of the note and mortgage. Included in this range of authority would be the power to lower interest rates, extend the term of the loan, and here is the kicker, the power to reduce the value of the note to the current value of the real estate. In the case outlined above, the bank would be forced to write-off $150,000.00. This is called “cram down.”
It shifts the threat of loss from the person who is buying the house to the entity that is lending the money. Isn't that a great way to force the banks to start lending again? The banks will protect themselves two ways: 1) increase the amount of the required down payment; and 2) undervalue the home for appraisal purposes. Most likely, it will be some combination of both. The bottom line is it will become much more difficult to buy a house.
In addition to the above, it penalizes those who have bought responsibly. If the beneficiary of the bankruptcy court’s largesse in the forced renegotiation of the mortgage and note sells the house within 5 years of the renegotiation, and the house sells for more than the renegotiated amount, the owner has to share the profits with the lender to “allow” the lender to recoup part of the forced loss. But after five years, the owner of the house gets to keep it all, even if the house goes up in value to what he originally bought it for. Take it from someone who watches real estate, eventually the value of the house will go up again, and happen rapidly. IT ALWAYS DOES.
Meanwhile, the rest of us who saved our money to buy our homes and bought what we could afford, are left to dangle in the wind. Bad behavior is rewarded once more by the nanny state. The irresponsible party stands to gain $150,000.00 at the expense of those who are trying to buy a house for the first time, those who bought responsibly the first time, and the shareholders of the banks, which generally tend to be seniors who bought the stock for dividend income.
While I understand the reasoning that everyone suffers when whole neighborhoods go into foreclosure, I think I would like for Barack to cram “cram down” where the sun don’t shine.
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