Bankruptcy Mortgage Cram Downs - A poor decision by Congresional Leaders!

Homeowners Protection Act of 2008 Bill proposes giving bankruptcy judges the power to reduce the principal amounts of home loans -- known as a cram down. Introduced earlier this month by Rep. John Conyers Jr. Supporters include the National Association of Home Builders.

This would be a terrible mistake by Pres. Obama if cram downs are allowed at the discretion of Bankruptcy judges. Cram downs should be handled through tax incentives or tax breaks for the Banks, Credit Unions etc. that will be taking a loss. Bankruptcy judges have abused the cram down of autos and other collateral in the past.

If you are not aware of what a cram down is read the following:

A court-ordered reduction of the secured balance due on a home mortgage loan, granted to a homeowner who has filed for personal bankruptcy. In a cramdown, the bankruptcy court splits the outstanding mortgage balance into two parts. The amount of debt equal to the current appraised value of the home is treated as a secured claim, which the borrower must continue to pay. The amount of debt in excess of the current property's value becomes an unsecured claim, which is usually not repaid in full. In areas where home prices have depreciated, cramdowns can result in significant mortgage reductions. In some cases, the judge may order the remaining secured debt amortized over the remaining life of the loan term, thus lowering monthly payments. In other cases, monthly payments remain the same as before the cramdown, and the secured mortgage is simply paid off faster.

This is totally ridiculous. No one knows what the RE value will be today, tomorrow or the future. It is an agreement between the buyer and the seller. It will cause banks, CU's etc. to tighten credit even more. No one deserves a break on their mortgage balance by filing bankruptcy. A RE appraisal is only an educated guess, they are not always accurate.

If we do allow cram downs on mortgages, it should be through tax incentives to the mortgage holder taking huge losses. Also the amount crammed down should be paid sometime in the future either with payments or at the sale of the home. I am sure it could be worked out very easily if the law makers used a little common sense. I am sure there are plans other than cram downs to fix the mortgage crisis.

Say no to allowing Bankruptcy Judges to cram down mortgages at the expense of our banks and financial future. It just does not make sense.

Democrats and Republicans alike, should not want the cram down of mortgages to become law without benefits to the mortgage holders and the mortgagee.

Ray Beaufait

Credit Scoring Systems - America's financial meltdown - The beginning of the end.

Credit scoring is a statistical analysis of each individual's circumstances to determine the credit worthiness of a person applying for credit. Your credit score is based on information received and sourced by credit bureaus.

Most banks, credit unions, mortgage companies, credit card companies and other lenders use credit scoring to determine your credit worthiness. Credit scoring systems are used to evaluate possible risk and loss determining on the criteria within your credit bureau report. Lenders determine whether to approve a loan, condition it, or deny credit. This scoring system also, in most cases, determines your rate of interest and credit limits. Authorizing credit or denying credit is supposedly implemented by a tested and trusted system. Note, I said a supposedly tested and trusted system.

Other companies use credit scoring also, such as insurance companies, employers, landlords and government departments.

The most used credit scoring system is FICO developed by Fair Isaac Corporation. Mortgage lenders use this system to determine the possibility of default by the borrower. All credit bureaus have a credit scoring system. Equifax, ScorePower, Experian Plus and Transunion all use some system. As I said earlier the most popular is FICO. Also some lenders including credit card companies have developed their own credit scoring models.

I personally believe the development of a scoring system was the beginning of the end in sound lending practices. As a 40 year veteran of the financial world I predicted long ago this system was not accurate and was discriminatory. The system was developed to make credit granting fair for all based on a score. I believe it did just the opposite.


I fought the system while I was working and continue to this day believe it is part of the reason our financial system failed. I always believed determining credit approvals by a scoring number was wrong. There are just to many variables in credit lending to put a number on an individual borrower. My experiences and the records I used to keep showed that the proper training of Loan officers to determine credits far exceeded any credit scoring system in regards to future success of the borrower.

Years ago, most lenders were well trained on the basics of credit. I believe credit scoring took the common sense and good judgement out of lending. I found as time went on it was mainly; "what is the customers credit score" to determine whether a loan was approved or not. Most of all the proven fundamentals of credit determining went by the wayside.

Credit scoring eventually determined what rate borrowers are charged. I have always felt this was discriminatory also. This was the beginning of sub-prime lending. Today's culprit of the mortgage industry. The lower the score the higher the rate. My theory was if you approved a loan because you are getting a higher rate, the loan should probably not be made. You could charge a rate of any excessive amount of interest, but if the borrower does not make his payments your fooling yourself. You will have a loss if the basics of credit are overlooked because of a higher interest rate charged based on a credit score.

Another source of the credit problem is adjustable rate loans. The number one factor of credit is can the borrower pay you. Number ONE! The borrower may be the most honest individual on the planet, but if he does not have the means he can't pay. It is that simple. Adjustable rate loans can change the number one factor if the rate changes on a ARL and increases his/her payment dramatically. But, this is another issue I may write about later.

There are many other factors in America's financial decline. Such as disparity of income, Wall Streets obsession with quarterly earning, deregulation and more. Credit scoring is just one of them and the beginning of the decline of credit standards.

Ray Beaufait