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Fannie Mae, Freddie Mac, JPMorgan Chase & Co., Morgan Stanley, and Bank of
America Corp. announced they are halting foreclosures through March 6, while
President Obama works out the details of his housing plan. Citigroup said
it will halt foreclosures until the administration has completed the details
of the program or March 12, whichever is earlier.
The banks are suspending foreclosures on owner-occupied homes; Fannie Mae is
suspending foreclosure sales and evictions for occupied properties; and
Freddie Mac is suspending foreclosure sales and evictions on properties with
up to four units
___________________________________
Edward F. Figaredo, Attorney At Law
LAW OFFICES EDWARD F. FIGAREDO
A PROFESSIONAL CORPORATION
10507 Valley Boulevard, Ste 822
El Monte, California 91731-9998
(626)444-9542
NOTICE:
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protected by the attorney-client and/or attorney work product privileges. If
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Mortgage cramdowns: a contrarian view
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Here is O. Max Gardners article responding to Professor Zywickis:
Dont Let Todd Zywicki Tear Up the
The Bankruptcy Mortgage Modification Act
The bad news is the infamous Z man is back. The really bad news is that he
is also rolling out his bag of old tricks, half-truths and myths, and just
plain old lies. We last saw the Z man telling the Congress back in April of
2005 that the Bankruptcy Reform Act was perfect as drafted and that he
ome
time and about 2 million pages of court decisions, we all know that the
so-called Reform Act is one of the poorest drafted statutes in the history
of the Congress. Suffice it to say, Thomas Jefferson would not even
entertain the possibility of using the Act as toilet wiping paper. Whether
you are talking to a creditor or a debtor, the reviews are the same, the Act
is garbage. Consequently, it is hard to accept anything the Z man says as
passing the minimum smell test. What can you say, he just stinks!
Nevertheless, as the nation faces a foreclosure crisis of historic
proportions, and as the economy teeters on the brink of another Great
Depression, the Mortgage Bankers Association of America has trotted out
Professor Z again to speak to our honorable representatives in Washington.
This time the good professor is telling anyone who will listen that allowing
bankruptcy judges to modify residential mortgage loans would be a profound
mistake. Zywicki supports this conclusion by asserting that mortgage
modifications in bankruptcy would provide a windfall for some troubled
homeowners but more importantly would increase the cost of future mortgage
loans for all Americans. In short, Zywicki is claiming that the Congress
may be in the process of creating a new bankruptcy tax on future mortgages!
Future Mortgages ---the proposed legislation only applies to mortgages in
existence at the time of enactment. Yes, Professor Z is out there again
battling against the dreaded bankruptcy tax in his on-going fight for
disinformation, half-truths and the Mortgage Bankers Way.
To support his position, Professor Z cites to a recent staff report by the
Federal Reserve Bank of New York that by reducing the cramdowns on vehicles,
the Bankruptcy Reform Act in 2005 resulted in an estimated average 265
basis-point reduction in motor vehicle loan interest rates. The Z man
asserts that to allow cramdowns on mortgages would increase the interest
rate on non-bankruptcy mortgage loans. Again, what he fails to take into
consideration is that the proposed legislation only applies to mortgages in
existence at the time the bill is enacted. In other words, there would not
be any increase in interest rates going forward because these new loans
would not be eligible for judicial modification in bankruptcy cases. One
has to ask themselves what relevance does interest rates for cars have to do
with the current discussion of judicial modification of existing mortgages?
What Professor Zywicki also failed to mention was that the study he cites to
support his proposition, entitled the Seismic Effects of the Bankruptcy
Reform Act, concluded that the 2005 Act must be added to the list of
reasons why subprime mortgage foreclosures surged. My God, Todd, can it be
that the same study your cite to support your argument says your perfectBankruptcy Act actually increased the number of home foreclosures and thus
added fuel to the current financial fire. In fact, the authors found that
subprime foreclosures rates were at least 12.6 percent higher [after the
Act] than the average subprime foreclosure rates before.
Of course, the Z man has never been shy about contradicting himself in his
own writings. For example, in an Op-Ed that was published in the Wall
Street Journal on February 13, 2008, the Professor first stated there was
nothing in Mr. Conyers proposed legislation that would prevent a debtor
from filing for bankruptcy on a $400,000 loan, writing down the value to
$250,000, and then several years later selling the same home for $300,000,
at which point the homeowner pockets a tidy little profit. But, in the
very next paragraph, the Z man states:
ent
plan for five years. If the homeowner sells his house while he is still in
bankruptcy, the mortgage lender can recapture some of any appreciation in
its value on a sliding scale -- 80% the first year, 60% the second, 40% the
third, and 20% the fourth.
So Todd, which is it, your so-called hypothetical example or the actual
language in the Conyer's Bill? If the homeowner gets to pocket that tidy
little profit, then who gets 80% of the profits from a sale of the home in
year one? Todd, dont they refer to this as a recapture of some of the
appreciation by the lender? And, in yet another missive under your name,
you referred to this as the clawback provision. Well, who has the claws?
I think we all know the answer to this one so just move on to your next
point.
Not satisfied with the extent of his disinformation campaign, the Z man then
proceeds to claim that mortgage modifications during bankruptcy will almost
certainly increase the loses of mortgage lendersand this may further freeze
the markets. Todd claims that the reason for this is that when
mortgage-backed securities were created, they provided no allocation of how
losses were to be assessed in the event that Congress would do something
inconceivable, such as permitting modification of home mortgages in
bankruptcy.
These types of statements by the Z man make you wonder what in the world is
happening in his little office at George Mason University. Specifically, a
substantial number of the Residential Mortgage Backed Securities include
else, bankruptcy losses. These provisions specifically include losses
resulting from cram downs of mortgage debts to collateral value. You see,
Todd, bankruptcy courts have been cramming down second mortgages, home
equity lines of credit, and first mortgages on second homes, vacation homes
and rental properties for just about 31 years. As a result, when these
securitized trusts were created, they took these bankruptcy losses into
account.
These so-called carve outs allow mortgage-related bankruptcy losses that
exceed a fixed threshold to be allocated across all classes of securities
issued in the transaction on a pro-rata basis, as opposed to allocating all
of the losses to the most subordinated securities first. As a consequence,
all of the various bond holders in these carve-out deals would share
equally, pro-rata, in the excess bankruptcy losses. It sounds fair to me.
Todd, what is your take on these provisions? Dont you think that those Big
Bonus babies at Chase, Lehman and Goldman knew what they were doing when
they signed up for these deals? Have you ever heard of the doctrine of the
assumption of risk? I mean these guys did have lawyers representing them
before they signed up for these deals, right?
Of course Todds disinformation ignores the other obvious ramification of
not allowing judicial modifications which is the prolonged escalation of
foreclosures that will result in the decimation of neighborhoods across
America. Nor will the rejection of judicial modifications save the
investors in all of these securities from the loses that they will sustain
from the increased foreclosures.
But, you know, the worst thing about Todds last doomsday scenario is that
the source he quotes (Moodys February 3, 2008 Special Report) concludes
that even with judicial modifications of mortgages in bankruptcy the loss
amounts to senior noteholders would likely be small, given that losses not
resulting from bankruptcy and cram-down would continue to benefit from the
subordination of more junior securities. So, although there could be some
losses in about 26% of the deals, Moodys concludes that the losses would
not be severe and would be low for the holders of the highest rated bonds.
Professor Z claims that the implications of the impact of mortgage
modifications on the senior bond holders is obvious and potentially severe
and that the uncertainty will exacerbate the already existing uncertainty
in the financial system, further freezing the credit markets. I am not so
sure about all of the Z mans uncertainties. What I am sure of is that
Professor Zywicki is certainly wrong on all counts and that all of his
so-called arguments are simply not supported by the facts or by the law.
And, quite frankly, it is sad to see a man who has been so thoroughly
disgraced by his support for the 2005 law to subject himself to even more
abuse and ridicule based on his opposition to mortgage reform in the
bankruptcy courts. George Mason states that Todd is a Senior Scholar at
the Universitys Mercatus Center. I would respectfully suggest that they
change the name from the Mercatus Center to the Moheliestous Center.
Heh, if the name fits!
O. Max Gardner III
maxgardner@maxgardner.com
PO Box 1000
Shelby, N.C. 28150
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Please note that Prof Zwyicki, who frequently supports lender positions and
who has conducted studies used by the bank lobby to support BAPCPA, offers
no alternatives to bankruptcy cramdown. He doesn't even mention the
proposal to form a toxic assets bank which can purchase these loans for
modification purposes. It is worth noting also that the "other" credit
markets he mentioned are already unstable and becoming more so by the day.
This may accelerate the process, but the government is already bailing out
the credit card companies.
David A. Tilem
Certified Bankruptcy Specialist*
Law Offices of David A. Tilem (a debt relief agency)
206 N. Jackson Street, #201, Glendale, CA 91206
Tel: 818-507-6000 Fax: 818-507-6800
* Bankruptcy specialist cert. by State Bar of CA Bd of Legal
Specialization.
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Keep in mind that the author of this piece is the same guy who testified in Congress that there was "not one word" he would change in the Bankruptcy Reform bill of 2005. Not a credible souce in my book.
M. Erik Clark
Borowitz, Lozano & Clark, LLP
100 N. Barranca Avenue, Suite 250
West Covina, CA 91791
www.BLClaw.com
Office: (626) 332-8600
Fax: (626) 332-8644
Board Certified in Consumer Bankruptcy
American Board of Certification
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