First, the proposal would swamp bankruptcy courts. There are only about 300 bankruptcy judges, and they are already busy with an increasing number of bankruptcies. Clearing millions of new mortgage cases will take a long time and thus have little immediate effect on the foreclosure crisis. In addition, the flood of new cases would delay the resolution of business bankruptcies, to the detriment of the economy.
This doesn't quite sound right to me. Many people already enter bankruptcy in a last ditch effort to avoid having their homes taken away from them; the automatic stay that follows from filing a bankruptcy petition buys them time to try and get their debts and finances in order so that hopefully they can figure out a way to continue paying for their mortgage while having their payments on other debt reduced. For these people, it simply means that the bankruptcy judge now has to figure out how to deal with the mortgage debt in addition to the rest of the debts that are being restructured in a Chapter 13. Now I'm sure there are many people who might be advised to enter bankruptcy for the primary purpose of saving their home, who wouldn't have already before the cram down provision is enacted, but I'm not sure if that's "millions" of new cases. Maybe.
Second, many debtors will be disappointed. Consider the parties’ incentives. Debtors will argue for low home values while lenders will argue for the opposite, to minimize their losses. Lenders will win many of these valuation contests: they have more expertise than individuals in making their case and greater resources.
This seems like an odd argument. For one, property is always being valued in a bankruptcy case. Judges frequently must oversee the valuation of property to determine how much the secured portion of the debt attached to that property should be. Sure this is more difficult for a home than it is for a car, but that's not much of argument against it by itself, so how is debtor disappointment alone a persuasive argument? Debtors almost always face creditors who know something more about the value of their property than they do. And I don't know how any of this is more disappointing than losing your home.
Finally, the proposal worsens economic uncertainty. A major cause of the financial crisis is that many banks do not know what their assets — and particularly home mortgages — are worth. Valuing homes is simple when prices are stable. An appraiser can look at prices in a neighborhood and plausibly infer that a particular house is worth about as much as similar houses there.
But even experts do not know how to value individual houses when a large number of them are in default, and thus potentially for sale, and cash is tight for prospective buyers. Under the president’s proposal, however, bankruptcy judges who are not experts at valuation would be required to price individual houses. Valuation thus will likely be a shot in the dark, inevitably affected by a judge’s personal sympathies. The arbitrariness of valuing single homes in bankruptcy will further increase the already considerable uncertainty regarding the value of the banks’ “toxic assets.”
This argument is a little more compelling. But I don't see how the end result of a judges' valuation (affixing the mortgage debt at a certain amount) is that much more harmful than the end result of having to foreclose on the home and sell it at a steep loss. If anything, I would think that fixes the value more quickly and with more certainty than waiting for the foreclosure process to produce a buyer who pays far less than the house was worth at the time it was bought. Now of course the buyer of a foreclosed home pays cash right then and there for the home, whereas the debtor in a Chapter 13 has to manage to make it through 3-5 years of scheduled payments to survive bankruptcy (and even then will continue paying on the house for a longer term.) But that's a price I'm willing to have lenders pay to help keep people in their homes.
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