2009-01-13 — ft.com
"We are not surprised to see the market react negatively," Mr Flanagan went on. "While lenders have long maintained that [the lack of cramdown] was needed to keep mortgage rates low, that notion ultimately proved to be a farce. To say that now is not a good time to change the bankruptcy code merely echoes the sentiment of the last 30 years, and ignores the facts that [this part] of the mortgage market is shut down anyway."
We echo this gentleman's fine statements. The inability to cram-down mortgages was a farce: it turns out default risk DOES still exist on mortgages. As long as that is the case, bankruptcy judges should be able to adjust mortgage debt accordingly. In fact, the very law that got rid of cram-downs likely inflated values to the point that any "benefit" of the law was undone. Now, the market's reaction is basically "oh shit, you mean we can't push ALL of the default risk onto the borrower and the government?" That's right, pricing according to risk -- the contemporary asset-backed securities market's worst nightmare.
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