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Mortgage cramdowns, cont'd

Regarding Carter's post: David Frum raises a question to which I don't have a very confident answer, namely, is there some substantial public policy reason why creditors who lent on a security of real estate should be protected from cramdown in bankruptcy, while creditors who lent on other security are fully exposed to it?

It also hasn't been explained to me exactly how the now-dropped mortgage cramdown provisions were thought to represent a "bonanza for trial lawyers," as House Republicans contend (though such provisions may well be suspect on other grounds, e.g. because they would retroactively change a set of rules on which lenders had relied). Debtors who would have declared bankruptcy anyway, of course, already have hired lawyers, and it might seem the effect of a cramdown would be not so much to augment those lawyers' fees as to leave more in the estate with which to pay other creditors, such as credit card companies. I suppose the premise must be that lawyers will convince more persons who could have avoided bankruptcy to throw themselves into it so as to avail themselves of the mortgage cramdowns. Maybe that's the theory -- and I welcome explanations from those more knowledgeable than I -- but it still seems to me a stronger argument against the Durbin proposal was that retroactive alterations in lender priority should be avoided as far as possible.

More: Ted tells me the story is more complicated than this, and says he'll try to write something up explaining the issue in wider perspective.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.