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Cramdowns

A debate is raging in Washington, D.C., about how to deal with America's foreclosure problem. One proposal is to restructure the loans using a tool usually seen in bankruptcy courts: The "cramdown." Senior Editor Paddy Hirsch explains.

About the author

Paddy Hirsch is a Senior Editor at Marketplace and the creator and host of the Marketplace Whiteboard. Follow Paddy on Twitter @paddyhirsch and on facebook at www.facebook.com/paddyhirsch101
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Explain why it makes more sense to give billions to the people who caused the problem than to send checks directly to the taxpayers. Even if taxpayers "sit" on the money by putting in their savings accounts, it is available to the banks for investing, but at least the taxpayers can feel like they're getting something for the massive debt their assuming. Better yet, distribute the money on a curve where the lowest income earners get the biggest check. It has been my limited experience that the lower the income, the less likely they will be to keep any of the money they get. What better way to stimulate the economy than having tens of millions of people flooding their local economies with thousands of dollars? Also, by giving it directly to taxpayers, the government recovers almost 1/3 of the money in the first year from income taxes. I just don't understand you humans and your accounting.....

Paddy’s videos are easy to understand and incredibly informative. Keep teaching us the ins-and-outs of the Byzantine world of finance. Only with knowledge will we be able to understand the mess we are in… and hopefully find a way out.

It should not take a cramdown for investors to agree to a principal reduction. What's the alternative? The stimulus package will not curb the housing meltdown. I'm on the front lines of real estate at ground zero (Florida) where 1 out of 87 home "owners" is in trouble. Realtors are pulling back on showing and listing properties (in trouble) with more than one mortgage. Banks are not working with Realtors. Within the month, new practices have taken hold. Suddenly, junior lien holders are selling debt. One recent short negotiation defines the growing problem: a junior lien holder verbally agreed to a $4,000 short payoff contingent of course on 1st lien holder short payoff. A few weeks ago, I received acceptance from 1st. Went back to 2nd (with whom I'd stayed in contact) for their written acceptance, only to hear that 2nd had sold to "investor" who demands $24,000 (not the $4k). 1st cannot force 2nd to settle, though 2nd will get ZERO in foreclosure with borrower forced to file BK. Why would a 2nd force foreclosure to get ZERO? Why wouldn't 2nd settle for $4k especially knowing the borrower has nothing to go after? This is the case with 5 of my short files. Realtors across the country are forming a petition to force the National Association of Realtors to issue a moratorium on Realtors taking short sale listings and/or showing properties listed as short sales. In many parts of Florida, 75-90% of all listings in the MLS are pre-foreclosures. Unfortunately, cramdowns and the recent stimulus package will not slow down or stop further tragedy. Bankruptcies are exploding...courts cannot keep up. I have two short sale files that I've worked for 18 months. Thank you, Paddy, for helping people understand cramdowns. It shouldn't come to this, but even cramdowns (which will HAVE to happen) will be wonderful for the people it helps but insignificant in the big picture. By nature, I'm not a pessimist either. Only from history books do I know The Great Depression. I cannot imagine a worse economic time as today. Every day, I hear from friends who have lost their jobs and cannot find work. Mike

Paddy,

Thanks for sharing this knowledge with us. In your 'Cramdown' session, what happens to the unsecured portion of the loan? Does the bank take a loss of $250,000? In addition, what do you mean by 'smaller interest'? Do you mean smaller monthly payment or refinancing for a lower rate?

Please let me know as I am very interested.

Thanks for your help,

Guy

Why do I not hear more of Paddy on the program? He's very good at explaining things so the average person can understand what's going on.
I look forward to hearing him more often on the air.

Dear Mr. Hirsch, Can I please please be your student?????!!!!

Hi Michael Forgive the confusion - if the judge orders the remaining secured debt amortized over the remaining life of the loan term, it's the monthly payments which will be reduced. Which helps the howeowner as it's his inability to pay his large monthly nut that's getting him into trouble.

Hi David Yes, the homeowners still technically owe the $250k, and they may well be able to pay it over time, if their situation improves. But because the 250 is unsecured, and the homeowners are bankrupt, they may well just throw up their hands and say "sorry guv - I'm skint." Which is why unsecured bonds in a bankruptcy rarely trade particularly high.

I believe the $250k in teh example is a loss to the bank. But my question has to do with the interest. Paddy says that this cramdown will reduce the barrowers interest rates. It is not clear to me how that happens. Reducing the principle owed and amortizing the new principle over the same period of time at the same interest rate will reduce the interest payment, but at the same rate. Is an interest rate adjustment typically part of a cramdown? Thanks, mike

What happens to the $250k? Does Fred still owe that money?

Thanks for these whiteboard presentations. They really help to understand what is happening.

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