The principal elements of OSPRIs approach to foreclosure are procedural and not substantive. This differs from various other Private and Public sector plans that envision a more homogenous mix of substantive government mandates.
The predominate motivation for all of these plans is the alleged market failure seen to be paralyzing lenders who are not often or timely choosing to renegotiate loans when these techniques would purportedly result in better returns than foreclosure.
OSPRI believes that if these negotiations are actually clearly superior, the market will adopt them. Further, this clearly superior value will be reflected in the value of the restructured mortgage paper, not solely in modeled future returns. Thus, the focus of our plan is finding a forum for creditors and debtors to negotiate such mutually beneficial outcomes as actually exist, rather than defining "sustainable loans", "haircuts" or other mandated provisions to be adopted according to government proscribed levels.
Above all, government policy should scrupulously guard the property and contract rights of lenders and borrowers. Contract and property rights undergird the unique blessings that America has enjoyed, and promise the surest path out of recession. Economists have spent the last decades painstakingly building respect for contract and property right as precedents to prosperity for developing nations. The lack of these securities chases investment, entrepreneurship and growth from these struggling economies and the same will happen to America if we loose faith in the very basis of our wealth.
In consideration of the following circumstances in the residential real estate and mortgage markets:
1. Homeowners with impaired ability to satisfy mortgage payments, refinance, and/or facing no rational economic alternative to foreclosure because their homes have depreciated in value to significantly less than the what is owed on them are most likely technically bankrupt.
2. The only arena in which lenders, to the extent that their collateral no longer secures a portion of the outstanding debt, may be forced to consider negotiating new contract terms with borrowers are bankruptcy reorganization proceedings.
3. Oft cited as irreconcilable, interests of different classes of investor within a single pool of mortgage-backed securities could at least be guarded and ultimately reconciled as separate classes of creditors in a bankruptcy proceeding.
4. Congress is explicitly empowered in Article I, Section 8 of the Constitution to:
"establish ...uniform Laws on the subject of Bankruptcies throughout the United States.
5. This power is cabined by individual rights, as interpreted by the Supreme Court, to prevent invasion of the present value of the collateral of secured creditors.
we recommend:
that it would be necessary and proper for Congress to Provide access to a Small Claims Court style forum protecting an individual in a Limited Residential Bankruptcy available once in a ten year period. This proceeding shall not affect any debts not originally secured by the principal residence. The result of this streamlined legal mediation would be negotiated amongst creditors, those with outstanding liens against the principal residence, and debtors, except as noted,. The result as provided below shall be adopted within a two month time frame, during which foreclosure proceedings will be held in abeyance, or foreclosure shall proceed. More specific terms with regard to altering of residential mortgages in such reorganizations, as an alternative to liquidation of the collateral, are as follows:
1. Unanimity amongst creditors is required for a reduction in the Liquid Present Value of workout paper below the Liquid Present Value of the collateral.
2. A Restructuring alternative to foreclosure that does not trigger the foregoing unanimity provision, may be adopted as an alternative to foreclosure by a majority of creditors with interests voted by a trustee pro-tem for each class within the securitization and voting power apportioned in the ratio to which each class holds principal interest in that securitization.
3. Failing a majority, a restructuring proposed by the debtor may be the result upheld by the bankruptcy court only where the unanimity provision is not triggered, and the debtor can demonstrably support payments on the restructured loan at a market interest rate commensurate with the risk posed by the restructured instrument; and where consideration for recapture of any principal or the present value of interest foregone at the order of the court is made through provision of an equivalent equity stake in the property. This stake to be repaid to the lender upon sale where the proceeds in excess of the senior mortgage are split in accordance with the proportion of lender and debtor's share excepting only any liens agreed between the mortgage holder or servicer and borrower to represent necessary capitalized maintenance.
There are other aspects to the "crisis" and the following paper appears to provide some much needed transparency to the system.
The Stahl Plan (part 1)
The Stahl Plan (part 2)
You may post questions and comments at the original blog location HERE. We would also like your feedback on the Stahl Plan
Find our first draft on this project HERE.
Follow this link for the The Principals and Principles of PAIL.
William Frey NY Times article
Representative Frank's response
Frey testimony
OSPRI Press Release on Frey-Frank debate
Other complications and unintended consequences we haven’t thought of?
You may post comments, questions and see the original blog post HERE.
Here are some of the comments, questions and background information.
Luigi Zingales, Plan B
NY Times, A rescue hindered by politics
A discussion with Richard Epstein
Why not let the bubble burst?
Does this plan subsidize housing prices?
What powers does Congress have?
How to roll-out the plan
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