Scandinavian Home Mortgage Lien Stripping (cramdown)

[Joanne98]

posted by Jason Kilborn

It seems increasingly likely that we'll see a reform of U.S. law to allow home mortgage loans to be stripped down (or crammed down, if you prefer) to the value of the home. I was surprised to learn recently that this issue had been debated in Scandinavia, and Nordic experience confirms that the factual predicate for such relief is present in the U.S. today.

In European consumer insolvency systems, secured debt is generally set entirely apart from the relief system. Debtors have two choices--pay secured debts as contracted (if, indeed, the debtor is allowed to make such payments within the confines of the plan for paying unsecured debts) or lose the collateral. When Danish reformers set out to amend their first-on-the-continent consumer insolvency system (adopted in 1984), the reform commission made what appeared to me to be a comparatively radical proposal--to allow the debtor to strip down home mortgage debt to the value of the home (as determined by court-appointed valuation experts). While Scandinavian reform commission proposals usually fly through government and then legislative approval, the mortgage stripping provision was removed immediately by the Justice Ministry from the bill that would become the Danish consumer bankruptcy reform of 2005 (yes, they had a 2005 reform, too!). Representatives of judges and lawyers supported the proposal, but finance and mortgage credit representatives strongly opposed it (surprise!), objecting that this measure failed to take sufficient account of lenders' interests and concentrated on them the risk of price deflation based on macro-economic forces beyond anyone's control. The Justice Ministry hesitated to embrace this proposal without a closer empirical examination of the problem (!), so the provision was removed in light of the fundamental position of secured creditors and the proper balance between debtors and creditors that lies at the base of the consumer insolvency system.

http://www.creditslips.org/creditslips/2009/02/scandinavian-home-mortgage-lien-stripping.html

[thunder rising]

1. Obama misses the point ... it's not just the interest, it's the upside down mortgage ... can't sell

the house to get away from it.

An owner with an upside-down mortgage is trapped if then the interest rate goes up to the point of not being able to afford the payment: can't sell it, can't pay for it.

[ixion]

2. that, in a nutshell, is why the "housing bubble" should never have been allowed

I looked at more than 3 dozen houses over the course of the bubble, mostly because I wanted to track what was going on because it concerned me. What I saw in that time scared the hell out of me. Why? Because it was easy to see the aftermath. Housing is the very core of civilization. It's a foundational tenant, not a commodity. I've always felt that was the danger to gaming the housing market. And looking at house after house that was in the 100k to 180k real-value-range being offered for 220k+, well, I knew then that we had a leviathan on our hands.

It was foolish for us to use the housing market as a profit center. We should have known better.