The Reason Why Wall Street Opposes Cram-downs for Personal Bankruptcies Might Surprise You

Recently Forbes published an article by John  Wake entitled “Congress Could Have Prevented 500,000 Foreclosures During The Great Recession But Chickened Out.” Echoing what Elizabeth Warren and Katie Porter have been advocating for years, it points out that cramdowns best preserve real loans in which both sides take a hit, but neither side gets a windfall.


To be clear, cram-down is the process by which the debt that the petitioner must pay in the bankruptcy plan is reduced to the value of the property. Business entities do it every day, often with full cooperation of lenders. Lenders benefit when there is a market downturn by preserving the loan account, albeit at a reduced balance due, but still earning interest. The equation usually balances out such that the lender comes out almost even.


Cramdown is a method of dividing the risk and loss from a negative economic event — like a crash in real estate prices where re al estate is collateral for loans.

In the context of transctions with homeowners, if it really is  a loan, then the onus of an accurate appraisal of the value of the collateral (homestead) is on the lender, not the borrower who is not expected to know all the nuances of a market in which the “lender” has performed thousands of transctions. That responsibility and ther esponsibility for viability of the “loan” is clearly spelled out in the Federal law governing lending (TILA).

I would argue that since that provision is in TILA, the clear implication is that in a bankrutpcy filed by the homeowner with a plan for repayment, the right to cramdown is implied — or else the provision would in most cases have no effect. Usually it is years past the short limitations period for TILA actions that the homeowner realizes the appraisal was inaccurate.

This highlights the main point about these false claims that the loan accounts were created and then securitized.

The compnies that were named as “lender” had no interest or stake in the fulfillment of the promise elecited from the homeowner to make payments. They were being paid fees either away. The larger the deal the more they got paid. So they were incentivizied to make sure the appraisail came in at the highest possible number.

And this is why I have rerpeatedly alluded to the fact that this is a RICO scheme. Except for the vitim homeowner, everyone benefited from violating the laws and rules governing lending. Everyone also beenfited from the fabrication of documents that contained false recitals of transctions that had never occurred.

An assignment that siad that $10 dollars and other valuable consideration was paid was merely advancing a lie to create the illusion of an enforcable liability against homeowners.

Wall Street does not oppose cramdowns for businesses. It opposes it for homeowners. A loan is a loan, and the economics are the same regardless of whether the borrower is a person or a business. And under Citizens United, business entities are persons too. So why the opposition?


Clearly, the epic wave of foreclosures drove prices down even further making it even more unlikely that “borrowers” would or could pay for an asset that was worth a fraction of the amount “borrowed.” Lenders were surely being foolish by destroying the value of their collateral. There is no other way to look at it — unless Wall Street is hiding something.


Cramdown works first by a motion to value the property and second by the claim’s value. It’s not the claimed amount it is the value of the claim —  i.e., the balance due in the unpaid loan account as shown by the production of that account as represented on the accounting ledger of the claimant.


So there you have it. Cramdown procedures would reveal the absence of any legally recognized claim. Unless there is a human being who can testify that they have personal knowledge of the transaction by which his/her employer acquired the implied (but never stated) unpaid loan account, there is no foundation for the introduction of any “payment History” or “Statement” or Notice.”


Wall Street doesn’t want cramdown available to homeowners because cramdown eliminates the liability entirely. And nobody wants that, right? We want the Wall Street players and their sham intermediaries to generate as much revenue as possible in both (a) the issuance of certificates and (b) the enforcement of the liens, even if they have no risk of loss, they have been paid off completely and they have no unpaid loan account.


It wasn’t just Congress that screwed this up by listening to Wall Street threats of armageddon, it was four successive presidential administrations evenly divided between Republican and Democratic.


I would add that W. Bush’s first reaction was entirely correct and would have led the way to an entirely different result than the 2008 recession. He thought that the banks did it, and if they are in trouble, let them fail. Had he not been persuaded by his treasury secretary Hank Paulson Former Goldman Sachs CEO) we would have all learned the truth — that there was no loss suffered by Wall Street because they were operating with “other people’s money” (OPM).


The ensuing absence of foreclosures would have allowed the economy to rebound far easier and faster than what happened. Look at Iceland which recovered in 3 months versus 15 years alter, we are still dealing with the meltdown.


As it turned out in the history of TARP, there was no loss suffered by the investment banks. They have been illegally acting like commercial banks and were seeking extra profits and revenues that they called “bailout” despite the absence of any losses.


Ignorance of the real facts at the highest levels of Federal and state governments showed its ugly face as Obama Secretary Geithner scrambled to protect his former employers and “land the plane.”


Troubled assets evolved, as information was received, from “losses” due to homeowner defaults to losses from the devaluation of certificates, and finally to the truth: hedge instruments wherein the counterparty needed a bailout to protect the profits of the like of Goldman Sachs. Even the hedge product was fraudulent and should never have been paid.


The proposal for cramdown was both reasonable and appropriate. It would have allowed for reforming the agreements such that some entity would be responsible as though it was really a successor lender, maintaining home values, and reducing the amount due from homeowners.


To be sure, everyone would have taken a hit, but there would have been a division of risk instead of forcing the homeowners to absorb an insurmountable loss.



see Congress Could Have Prevented 500,000 Foreclosures During The Great Recession But Chickened Out


Nobody paid me to write this. I am self-funded, supported only by donations. My mission is to stop foreclosures and other collection efforts against homeowners and consumers without proof of loss. If you want to support this effort please click on this link and donate as much as you feel you can afford.

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Neil F Garfield, MBA, JD, 75, is a Florida licensed trial and appellate attorney since 1977. He has received multiple academic and achievement awards in business, accounting and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.
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But challenging the “servicers” and other claimants before they seek enforcement can delay action by them for as much as 14 years or more. In addition, although currently rare, it can also result in your homestead being free and clear of any mortgage lien that you contested. (No Guarantee).

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3 Responses

  1. It was Barney Frank who, in the wake of the financial crisis fraud, advocated for bankruptcy reform to assist homeowners. Barney Frank knew well how the GSEs operated, and what had occurred by the Community Reinvestment Act and resulting birth of PLMBS with sale of top tranches back to GSEs from which loans originally came. Congress voted down bankruptcy reform. Unfortunately, the CFPB was not set up to investigate individual complaints, and years go by before any action may take place. Even then, action is not inclusive and difficult because of the res judicata effect of the Obama settlements with the big banks. Now, the constitutionality of the CFPB is in question as funding is provided by the Fed Res/Treasury (and not Congress) who handled the bail-out and purchase of “toxic” securities (and loans) and then sold to the debt collection market via the Public Private Investment Program. Unwinding the fraud is almost impossible given the many layers and parties involved over such a long period of time. Both Warren and Porter are aware but have not come forward to disclose.

  2. Excellent analysis! Apparently their the goal was to benefit from the investment Ponzi scheme, then redefine it as a loan for the purpose of foreclosures.
    At this stage of the game I do not believe the government could claim ignorance more than likely they were a willing participants in the greatest heist carried out by Wall Street and the banks.

  3. I think this is a very cogent article. I have a unique cram down story to share. I filed Chapter 11 on 2008 with five properties. I Chapter 11 a person with more than $1M in debt is treated as a business. I had an appraisal done for a property serviced by Wells Fargo. My appraiser brought it in at $765. Wells appraiser brought it in at $465. We appealed to the judge to accept Wells’ appraisal since they were the servicer, and representing the table lender (the loan is still held by the table lender which went out of business 13 years ago.,) The judge agreed and the cram down was reduced to $465K.

    Wells, realizing their mistake, took to returning my payments (five years of returned checks), ruined my credit by reporting me as late, never accepting the cram down value and in fact never giving me an accurate payoff number since their calculations were based on the loan amount, not the cram down. It is now 15 years later, Wells is still trying to foreclose, the building is worth close to four times the cram down, and Wells has transferred the loan to Specialized Loan Servicing which is under a consent decree with the Consumer Financial Protection Bureau. (Yes I have filed two CFPB appears the bureau has become much more toothless based on their latest response.,) Anyhow, I am choosing to sue for mortgage fraud, violation of contract etc. Trying to avoid going back to bankruptcy court -:I reopened once and my original judge had moved. The new crooked judge let Chase foreclose on a current loan which had not been crammed down, but which was a former WaMu loan and thus free money for Jamie Dimon to cover his London Whale loss, $6.5B loss of depositor’s money.

    After reading the article Neil, nowhere do you mention the borrower also having the right to get an appraisal, and then working with the judge to determine which appraisal is fairest. Was that an oversight? Because allowing the bank to unilaterally set value they (normally) have every reason to shop for the highest appraisal.

    Still, yes, a cram down for Chapter 13 would be in the very best interest of the funder (not the servicer) and the borrower. It should be noted the owner of the note of my property is a Trust, the fact of which Wells has done everything to obscure. Wells has no skin in the game, just servicing rights, and of course plans to pocket the proceeds

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