Tuesday, March 03, 2009

If It's Good Enough For Donald Trump...

Today's "JUST SHUT UP AWARD" goes to bankers everywhere, though maybe I should also offer 'thanks' for token amusement supplied by the outcry over letting bankruptcy judges re-write mortgage terms to reflect lower housing values.

"OMG! A mortgage is a CONTRACT, dammit, and we can't have JUDGES re-writing CONTRACTS now can we??!!" seems to be the prevailing attitude among bankers and their media shills, none of whom, apparently, have ever stopped to think about what "bankruptcy" means, personal or corporate. They're reduced to coining sound-bite-friendly terms like "cram-down" to convey their ire that homeowners figured out Donald Trump's secret to business success.

Bankruptcy, defined, IS a process of court-supervised abrogation of contracts. Sometimes it's a last-ditch attempt to re-write contracts so a business can reorganize its affairs and continue as a going concern (Chapter 11.) In other circumstances, it's an orderly liquidation of a business (Chapter 7.) Regardless, contract-holders are "offered" new, court-ordered and approved contractual terms, like it or not.

No matter if you're a supplier, employee, pensioner, lender or stockholder, you get what the court says you get, not what a 10- year-old contract says you should. You were "owed" $100,000? Guess what? You're getting $15,000. Anything more is just wishful thinking. Deal with it.

And, dammit, if it's good enough for Donald Trump, well, it's good enough for several million mortgage holders too.


Spokane Al said...

I think that if bankrupcy judges are able to restructure mortgage loans, that will, in the long run cause a rise in mortgage interest rates as lenders recalculate potential future losses and factor those into profits.

A recent test on this very subject showed an increase of 250 basis points for the cost of new loans when judges were allowed to restructure these debts in bankruptcy cases.

Will that cause additional deadbeats to buy houses? Will that generate an easy out for people who would otherwise attempt to pay off their home loans? Are we ready and willing to bear those costs?

As always there are no easy answers.

Vertical Man said...

Thanks for the comment! I think mortgage costs are going up in the long run anyway, either from mortgage lenders getting smarter about their business and pricing in some incremental risk, or from all the government borrowing "crowding out" other borrowers and forcing up the rates they pay.

And bankers have nobody to blame but themselves for "deadbeats" buying homes. If it happens again there STILL won't be anybody else to blame.

My beef is really with commentators who have come to view bankruptcy and its judge-ordered re-writes of contracts as normal for corporations but some sorta socialist plot when homeowners do it.