Exert from: The Miami Herald Posted on: April 6, 2009
By Patrick Danner, The Miami Herald
A key component of President Barack Obama’s plan to curb the rising tide of foreclosures is to give bankruptcy judges the power to write down mortgage debt for people in bankruptcy court. It’s known in bankruptcy as a “cram down.”
The legislation has the support of numerous judges, including A. Jay Cristol, chief judge emeritus of the U.S. Bankruptcy Court in Miami.
Cristol, who was appointed to the bench nearly 24 years ago, believes the legislation is needed to prevent people from otherwise being put out of their homes. He blames the banks and mortgage brokers for inducing unsophisticated borrowers to enter into adjustable-rate and other exotic mortgage loans.
“Sadly, we put people out of high school who can’t balance a checkbook, who don’t understand finances,” Cristol says. “If you’re of the attitude, well those people have to look out for themselves, the hell with them, then that’s one philosophy. That’s not my philosophy.”
The bill already has passed the House of Representatives, but doubts about whether it will clear the Senate have caused it to stall. A vote may not happen until after April. …
Q:Why should bankruptcy judges be given the power to renegotiate the terms of a debtors’ mortgage loan?
A: Bankruptcy judges were given the power to renegotiate the terms of every type of loan of debtors in 1979, with the exception of primary home loans. The net result is, it works. We help everybody. Generally, it’s to the benefit not only of the debtor but also of the lender.
Today, the banking lobby, the banking industry is kidding itself and is stupid. They have a loan on the books that is $500,000 and they have it secured by a property worth $300,000. [But] they still want to carry it on the books as a $500,000 loan, when it isn’t. And they foreclose on it, since we can’t stop them and rearrange the loan. [So] they suffer not only the loss of the fictitious value they are carrying on their books, but they’ve got a nonperforming loan.
They take a beating on a home, where if they made an adjustment and allowed the debtor to stay there, they would have had a performing loan. They would have had a lesser return than they would have liked, but it still would have been a performing loan at a modest profit. Instead, through their greed on wanting the bigger profit, they shoot themselves in the foot. The bankers are, in my opinion, greedy and stupid and not acting in their own best interest. …
Q: Some people have the opinion that giving bankruptcy judges this power would simply be rewarding bad behavior by helping people who took out loans that were more than they can afford. How do you respond?
A: It may be that in some instances it would be rewarding them. On the other hand, if they took out a loan and could make the payments on it, then everyone benefits. …
If we can readjust that [loan], then they can stay in the house, the family stays together, the car [lender] gets paid, the bank gets paid. But if the car [lender] takes away the car, then [the debtor] can’t get to work and then they lose the salary to pay the mortgage. They’re out of the house. Under those circumstances, they can’t get credit to buy another house. They’ll be lucky to find an apartment. Many times they are on the street.
…
Q: Will this open the floodgates for people filing for bankruptcy?
A: I remember in law school when they talked about opening the floodgates, one professor said, “I wonder when they talk about opening the floodgates, what are they afraid will flow through? Justice?” …
This makes a lot more sense for the market place than keeping Obama’s mortgage plan bottled up in the Senate so that foreclosures continue to drag down everbody’s home values.
