Well, look at how much you pay in interest on your credit cards. Then look at how much you pay in interest on your auto loan. Then look at how much you pay in interest on your home loan.
The credit card is what you pay for unsecured debt, all of which can be wiped out in bankruptcy. The auto loan is what you pay for a secured loan that can be modified in bankruptcy. The mortgage rate is what you pay for a loan that can't be modified in bankruptcy.
There are other differences, of course; autos depreciate faster than homes, and they're easier to hide from the repo man. On the other hand, they're usually a lot more liquid, shorter term, and represent a smaller chunk of income.
You can't get around the fact that if bankruptcy judges can write down mortgages, lenders will demand to be compensated for the potential losses. That means everyone who doesn't end up in bankruptcy pays more to subsidize those who have, and also, it will be even harder for higher default risks to get mortgages.
There's also the fact that you're going to encourage a lot more bankruptcy. This will be bad for an already very fragile financial system, and it won't necessarily be better for the bankrupts. Generous bankruptcy is one of the better innovations that America has come up with, and we're still a world leader there. But by late 2005 it was clear that people were taking it too often; if you can get by without declaring bankruptcy, you're almost certainly better off not doing so.
Copyright © 2009 by The Atlantic Monthly Group. All rights reserved.
At least until recently, more people defaulted on car loans than home loans. They used to think that the home loan was the last thing anyone would default on, so car loans should also be more expensive for the higher default risk even ignoring write-drown, liquidity, and recovery risk.
I'm still wondering if the changes in bankruptcy laws caused the financial mess we're in.
While I follow and agree with your logic, "the data does not track you"
I pay 5.5% on my home loan, which i consider good for a first time home buyer.
My vehicle loan is at 9%, due to being a used vehicle, but if I felt foolish enough to buy a new one, I'm told I could find a deal under 4%, and even 1% seem to appear from time to time.
My not used credit card sits at 12%, which I thought was fantastic when I first got it, but had I needed one, I could reply to one of those 6%-8% offers.
In other words, if mortgage principle could be negotiated, we would see loans with a 9% interest? That does not seem so terrible. I would have thought the cost would be much higher.
zic - why don't you ask the Senator from MBNA, Joe Biden? Or try Chris Dodd?
You mean there's a relationship between the amount fo risk to the lender and the rates that are charged? Whoda thunk it?
I've had mortgage rates ranging from 3.75% (assumed loan) to 12.5% (Jimmy Carter era). We moved around a lot in the military and in the decade after that. Right now I am at 5.25%, having refinanced twice in the last 4 years, down from my 7.0% ARM. This should be the last house I ever own, and my affording retirement depends on having the mortgage paid down by the time I retire.
There's a huge difference in how much house you can afford depending on the mortgage rates. 9.0% mortgage rates don't seem like much when compared to credit cards, but it's a large increase in the monthly payment for a loan the size of a house.
As for the initial question, I've already got my house, and the bank can't change my contract. But I pity all the rest of the poor smucks out there who won't be able to buy houses should the change come to pass.
Ken,
5.5% vs 9.0% would make your mortgage payments 41% higher.
Also a new car at 1% could very well have the same payment as a used car at 9%. So, why is buying new foolish again?
Bankruptcy law is pretty varied in different nations and states. There are jurisdictions where judges can modify mortgage liabilities in bankruptcy. My impression is that so far the heirarchy of interest rates faced by the consumer has not been greatly altered by this power. But it does encouage personal bankruptcy.
More generally, I have been feeling towards a way of discouraging 'speculative bankruptcies' in jurisdictions where the bankruptcy rules are generous. A speculative bankruptcy is one where an economic agent has taken risks reckoning that if he wins he wins, and if he loses his creditors pay.
The best that I have come up with so far is a tax operating for some years after bankruptcy which collects a percentage on wealth possesed by the bankrupt over a threshold (similar to an inhertitance tax threshold). Somebody must have a better idea.
The only problem with your logic is bankruptcy judges are allow to write down the debt on second and third homes. Even though based on your description they are are the same.
So why shouldn't bankruptcy judge be allowed to write down mortgage on primary homes when you are allowed to write down debt on your second and third home.
Also by allowing bankruptcy judges to write down the loan to the fair market value. It avoids foreclosure.
Ken-
Your data actually does support what Megan is saying. The reason your loan for a used car is more is precisely because it is used. The car, since it is probably older will depreciate even faster as it ages over the life of the loan and you put more miles on the car. If you have a 60 month note and you defaulted early in the loan there is the likelihood that your car would not be worth the total payoff of the note. Higher risk=higher price
Let's also look at used cars. People who purchased used cars do it because they may not be able to afford a new vehicle. Unfortunately you get lumped into the same group with them for actuarial purposes. Your credit may be great, but the lending institutions can't "redline" their loans. If you qualify, you qualify doesn't matter what the interest rate could be.
Megan-
The other problem with cramdowns are the impact they have on investors into the mortgage business. If you as an investor can't be sure what you are going to get and a judge can arbitraly change the rules, you may not be willing to invest more money in the mortgage area. If the banks had failed and the moral hazard lessons learned; lending practices may have changed. Investors may have been willing to stick with the market. Cramdown may force investors to go elsewhere with their money, only exacerbating the home price decline.
I have two auto loans, both on used cars, both under 5%, and a 5.625% home loan. If you get dealer financing you can get much better rates, down to nothing, on auto loans. Sooooo.... what's the point here? Or do people I don't know actually pay credit-card-like rates for auto loans?
Following onto Matt C.'s comment I think it is right that having the ability to cram down by a bankruptcy judge would have stifled the development of a more liquid securitization market thus the lower rates were due less to this that a judge could act against you but rather than (at least for a time), higher standardardization led to better liquidity and lower cost.
My background is more in corporate debt than mortgage debt but in corporate loans there are cram downs all the time, basically lenders agree to take a haircut on their loans however what the lenders will typically get is the upside post bankruptcy as most of the equity in the company after bankruptcy will go to the lenders. This is why you see an active market in distressed debt securities - investors are gauging what price they are paying to get a piece of the equity after reorganization.
In today's world where you have borrowers with serviceability issues and underwater positions there seems more likely to be a solution where a cramdown could work. Here the court could rule that if the borrower could service say a 30 year fixed rate at 90% of current value, then that will be the new regime. The lender could also receive some type of warrent/contingent equity/non-cash-pay junior mortgage for the difference for upside. Since selling the property at FMV still results in loss not clear how the modification is any worse in this situation.
So it seems the non modification provisions are hampering an efficient resolution of the process. That said even if the non modification provisions were to dissappear, what would be ineffecient is the bankruptcy courts, as I don't think they could handle all the case loans that are likely to come.
Can somebody with more knowledge of bankruptcy clarify/cite the rules on mortgage write-downs? Because I thought the rule on secured credit was either 1) sell the asset, send the cash to the creditor, and dump the deficiency in the pot with the other unsecured debt or 2) let the debtor keep the asset and leave the debt undischarged.
I am, however, far from an expert on the question.
@jmo
"Also a new car at 1% could very well have the same payment as a used car at 9%. So, why is buying new foolish again?"
A hell of a lot fewer payments. a 25k new vehicle can be had for less than 10k when 3 years used. Assume a 4 year note for a new vehicle and a 2 year used one. I get 4years @ $531/mo vs. 2 years @ $456/mo. Total paid for a new vehicle? $25488 vs $10944. Throw in an extra $2k, which should safely cover increased maintenance, and I'm still well ahead.
However this logic only holds if you do not rely on your vehicle to act as your status symbol.
@Adam Freeman
"Also by allowing bankruptcy judges to write down the loan to the fair market value. It avoids foreclosure. "
Someone has to eat the cost of that loss, and it will get passed on. Based on your post, perhaps we should be asking why second and third house loans can be written down, while the first cannot?
Since selling the property at FMV still results in loss not clear how the modification is any worse in this situation.
If the modification is no worse for the lender, then there is no real need for cramdown, is there?
"a 25k new vehicle can be had for less than 10k when 3 years used."
First, you aren't comparing MSRP new to a good deal used are you? You should, of course, compare the best deal new to best deal used.
A 2008 Honda Accord EX-L has an MSRP of $25,860 but you could get one new for 23,428 plus 3.9% for 60 months plus 500 cash back.
A 2005 Honda EX is $15,000-16,000 with 6.69 for 60 months. New $421 per month used $306 per month. If we assume that a Honda Accord will last 18 years and go 270,000 miles then a 3 year old Accord will have 20% less life left in it, which would equal $84 a month. So buying used saves you $31 a month.
If we include the value of the warranty coverage it's actually cheaper to take the good deal on a new car.
This doesn't seem intuitive to me. On the whole - it is in the banks best interest to have a large customer base that is credit worthy. Once you've declared bankruptcy you can get back into the credit game within months (credit cards) and into housing within years (2-3yrs).
I'm pretty sure that the mess we're in now has parallels in the past (Sweden in the 90's etc..) and the examples of a quick recovery are always tied to:
- direct capital injection (government buying stock in the banks)
- writing down of bad debts, better accounting rules
- renegotiating bankruptcy & loan terms between creditors and debtors
Also - Japan did not do the above and judging from the direction of the Nikkei some 20yrs later I want us to avoid their mistakes.
-Joe the Plumber
"Drill Baby Drill!"
Ken,
The only cars that would be 25k new an 10k after 3 years would be something like a Ford or Buick. A 2008 LaCrosse is 24,500 - and a 2005 could be had for 10k-12k. But, of course, no one is paying MSRP for the Buick. It's more like 21,500 - 2000 cash to custom from GM - 1000 cash to dealer - 2.9% for 60 months so we're lookin at maybe 17,995 on a good day. So in reality it's 18k new vs 10k used. Add in the financing and the warranty and the 20% shorter vehicle life and again it's a wash. Or at best a very nominal savings...
This is probably nitpicking, but is it a bad thing if it becomes harder for high default-risk individuals to get mortgages? Despite the coordinated government effort of the past half century, I don't think everybody should own their home. Canada seems to have been well served by its lack of a mortgage interest deduction, by the way.
Actually, it is the LUXURY cars that provide the best used bargains. So if you do plan to use your car as a status symbol (or, for some of us, a favorite toy), buying used lets you step up a class for the same immediate cost -- and better resale value.
The car, since it is probably older will depreciate even faster as it ages over the life of the loan
Huh? Since when does depreciation accelerate with time? What happened to the timeless "it costs you $N,000 to drive a new car off the lot"?
Noah--usually you get better rates on dealer financing because they jack up the price in order to give you a "lower" rate.
The problem with making home loans subject to court ordered renegotiation is the effect it will have on the availability of mortgage credit. The obvious way for the lenders to protect themselves is to require a large down payment, say 30%. Then a young couple would be forced to borrow from their family, or to forgo buying a home. ARMs with low down payment costs would go the way of the dodo bird. This scenario would have a negative effect on the housing construction industry. So what we're really discussing is trading off future loan availability against helping currently overextended borrowers. It's not an easy choice. The banks are already trying to renegotiate Subprime ARMs into thirty year fixed loans. This process can involve a cram down, but it's voluntary to the holder of the note. Legislation suppressing refinancing penalties is likely warranted. Interfering in existing contracts by fiat is dangerous, because it increases uncertainty in already dangerously unstable lending markets.
Rob Lyman:
I believe, in Chapter 13 the "cram down" is available for secured debt other than mortgage debt on a primary residence.
I don't understand why mortgages on 2nd and third houses can be crammed down. Why are people allowed to hang on to them at all in a bankruptcy? Noone needs a 2nd or third house - they should just be sold and the proceeds used to discharge other debts.
@jmo
Are you a car dealer? It almost sounds good, but there are a few assumptions that I just can't agree with.
16k loan for 60 mo? Absolutely no way. The whole point of buying a cheaper (used) vehicle isn't to lower the payments, but to take out a shorter note. 2-3 years down its paid off, and I'm driving a free car. I'll leave the extended warranties for people who can't turn a wrench.
However, I always suspected the case was as megan stated. The price is jacked up to include the cost of the loan, which is then given away at a low interest. I don't see any other way to explain how they could afford to finance cars that way.
And 60 month loans? Do people really take those?
Sec. 1332 of the Bankruptcy Code does say that the rights of secured creditors can be modified under the payment plan.
But Sec. 1325, "Confirmation of Plan," lays out elaborate rules for secured creditors, and 1325(a)(5)(B)(ii) suggests to me that the full claim must be paid up to the value of the property in which the creditor has a security interest. But I find the section confusingly written, so it would be nice if someone with experience in this area could construe it for us.
Megan, your Credit Card example fails and makes me wonder how well you've researched this. Your example also illustrates the dreamy artificiality of the "free market" and Moral Hazard myth we're seeing un-spool. Yes, CC and unsecured debt is supposed to have a premium to offset it's risk factors, but that has been written out of the (social) contract with cardholders ongoing since the late 80s and most recently with 2005's Bankruptcy Bill. Cap One and others reserve the right to raise rates in their fine print due to "unforeseen market and economic circumstances" whether cardholders are diligent and prudent or not.
Frozen credit is a cultural and structural failure very much akin to the person who finds themselves in a minefield -- no move is the only sensible tactic, but you'll eventually starve without rescue. Yeah, the explosives are all the spin, marvelous lies and fairy stories of bootstraps and marketeer wisdom.Yeah, I'm a business-person. And my partners and me find the deleveraging of trust far more troubling--long term debilitating--than the asset delever that's happening in mortgages and other instruments. Mortgages are much easier to fix than the executive and professional entitlement mnetality that yields Golden Trampolines like the Bankruptcy and FASB rules of this country.
Vehicle loans are modified in one of two ways.
The cram-down or redemption: where the auto lender gets the current fair market value of the car in exchange for releasing the lien. They actually do better here than if they just took the car, because courts use the NADA values of the vehicles, which are typically inflated.
In a chapter 13, the bank gets the statutory judgment rate on the loan, which is about 8%. Most importantly, they've been able to do this for a very long time. The creditors knew the risks before they made the loan.
I'm not too keen on judges suddenly having cram down power on houses. The great thing about the law is that even when its stupid and counterproductive, you know the rules. Changing major things like that midstream is bad for trust in the law.
It wouldn't be too bad to give judges the power to cram mortgages made AFTER the law was passed; both sides would know what was what. But that isn't too helpful to anyone at this point. Taking a mortgage, the rock solid, we get paid or we get the house loan, and suddenly changing that is a really bad idea. Everyone upside down on a house could file a 13 and transfer all the risk for their home value onto the mortgage company, when currently the owner has to give up the house to escape a really bad loan. You'd see a flood of Chapter 13 bankruptcies if people figured out they could get above water on their mortgages at relatively little cost to themselves, and even if they aren't financially distressed.
Ken,
If you're getting a Camry for invoice plus 0% financing for 60 months, why wouldn't you just keep your money in the bank and take the free loan from Toyota?
I just think you need to run the numbers.
The two biggest mistakes people make in evaluating new vs. used are:
1. Comparing the MSRP new to the price used. They should compare the best price they can get new vs. the best price they can get used.
2. Failing to account for accumulated wear and tear. Even if you say the car is going to last 20 years and 300,000 miles - that still means a 3 yo car has lost 15% of it's value.
For example they say 5 yo Corollas are selling for 80% of the price new. When you consider that even if you expect the Corolla to last 20 year, that still means it's lost 25% of it's value. In that case you are most definetly better off taking the 0% for 60 months deal from Toyota and buying new.
@ian: the multiple properties in question aren't necessarily vacation homes -- they could just as easily be investment properties, whose rent provides part or all of the debtor's income.
@jmo
Since we've totally given up on the topic...
I don't think you are pricing wear and tear correctly. A car has some wearable items, and some that aren't. Most components, unless abused, will outlive their owner. A 20 year old car may be worthless to a seller, but it is often very cheap to keep in functioning shape.
When exactly does a car "wear out"? I keep seeing people dump their old, paid for car, because it was "dying". They proceed to spend $20-$30k on a new car, when in reality they were looking at a $1500 repair bill. Sure, they also get to be seen in a shiny new car, but what exactly is that really worth? Really?
If you plan to switch you car every few years, than the concept of "value" has some sense. On the other hand, if you use a vehicle until its value becomes negligible with the full intention of giving it away to someone at the end of its life, than it sort of changes the math, doesn't it?
Unless I'm completely missing something, here is how I see it.
I could a. Buy a 2-3 year used vehicle, pay it off in 2 years, keep it for another four, then give it away to someone who needs it more than I do. Assuming a quality vehicle, and good maintenance, I've spent around $15k on this vehicle in 6 years (not counting fuel, tires, oil and other consumables). Or b, But a $30k vehicle, stretch the payments for 60 mo. then keep it an extra year, and then have to worry about getting my "value" out of it. How much more could I really charge for a 6 year old vehicle than I could for a 8 year old one?
Once a vehicle passes around 130k miles its "value" makes a giant drop. After that, it stays pretty constant.
Maybe hybrids will change all that. Batteries are expensive, and they do actually wear out. Engines and transmissions really don't.
Ken,
You talk about 15k used and 30k new and I think if you look at the numbers, the gap isn't nearly that large. Obviously if a new car was 30k and a 2 yo used one was 15k then used makes perfect sense. But, if the new car was 17,500 and 3 yo was 12,500 it doesn't make as much sense.
Meagan,
In today's market at least isn't the possibility that the mortgagee might not recopup the principal already priced into the cost of lending? If not, it certainly should be! There are two increasingly common ways where this is already happening: short selling (where the property is sold for less than is owed and the difference is forgiven) and foreclosure sales that bring in less than is outstanding on the loan, again with forgiveness of the difference. The government even passed a tax exemption to facilitate both these outcomes. Seems to me that a bankruptcy cram down would simply replace one of these options (most often the foreclosure one).
Predictability is the key here.
States where you can't go after the person for foreclosure deficiencies exist, and that's fine as far as that goes. The other solutions are voluntary. Injecting a fundamental change in the nature of the mortgage midstream is a very bad idea, if only for the precedent it sets. Mortgages are 30 year loans; that's a lot of exposure to sudden changes in the rules.
Keep it the same. If a dude is so far underwater on the house he doesn't want to pay for it anymore, he can walk away totally debt free in bankruptcy. That's a nice reality check about what the debtor thinks about the property; if he really thinks hes totally underwater, he can walk. What will happen if you let people cram is that clever lawyers like me will cram every mortgage we can, whether they can afford it or not; whether the price really reflects the value of the property or not. If/when housing prices bounce bank, do you plan on de-cramming the mortgage? No? What's great about cars is that they almost always go down (unless they are really special). There's no potential windfall 10 years down the road created by the cram on assets like that. I hope houses will eventually start gaining value again, which is something no Dodge Neon has ever done.
Re: What will happen if you let people cram is that clever lawyers like me will cram every mortgage we can
As far as I know we are talking about allowing this only in chapter 13 bankrupticies (and only for owner-occupants). That's a considerable bar. If someone is on the verge of bankrtuptcy their mortgage is probably already non-viable and the alternative is foreclosure or maybe a short sale. In both cases the mortgagee is already likely to lose money given today's market.
Several of the posts suggest that the write down of mortgage debt in a Chapter 13 bankruptcy would be arbitrary. This is not correct. The idea would be, like any cram down, to provide the creditor with the present value of its collateral, paid over time at a market discount rate. This should be a better economic result for the creditor than foreclosure because the transaction costs are much less--no foreclosure fees or costs, no rehab costs, no holding costs, no resale costs, etc. Experience teaches us that the players in the bankruptcy system--judges, lawyers, creditors--would quickly adapt to this process and that the value would be routinely agreed to after a relatively short period of time. Addressing the issue this way would also avoid the difficulty in obtaining consensual workouts that comes from widespread securitization of home mortgage debt. Many of the securitization deals require unanimous consent to modify the terms of the mortgage and getting that is just not feasible.
There has been at least one empirical study that suggests that market rates for mortgages that can be modified (2nd homes, for example) are not materially higher than market rates for those that can't (primary residences). Don't have the cite handy.
Of course, one economic consequence to the lender of allowing primary home mortgage cram downs in chapter 13 could be the loss of the opportunity to recover future increase in value--for example, in the foreclosure scenario, the lender can opt to hold the property for a sufficiently long period of time for property values to recover and then sell the REO at the higher price. In the chapter 11 context, this issue is addressed by Section 1111(b) which allows a creditor to opt to have its debt treated as fully secured even if deeply under water, thereby requiring the debtor to pay the full nominal amount of the claim over time. This is more difficult to accomplish in Chapter 13 because the time period of the plan is limited to five years, but some provision could be added to the code to give the lender all or part of future appreciation so that it could recover the "stripped down" part of the debt upon a later sale or refinance when the markets recover. The main point is that the lender would receive the economic equivalent of its recovery on foreclosure (without the transaction costs)and the payments would be reduced to an amount that reflects the current market.
The final point is that experience has shown in the commercial context that when debtors and creditors understand the risks and benefits that come from the possibility of cram down in a Chapter 11 context, they tend to make a deal that reflects what would happen if such a case were filed. Because of the securitization issue, this might lead to the hitherto unknown concept of a "prepackaged Chapter 13", where the case has to filed to effectuate a deal that the servicer can't make on its own.
A couple of reasons against bankruptcy modification:
It's a very ad hoc solution and ad hoc ness raises policy questions: If the argument for intervention is to address some systemic effect, then shouldn't the solution be systemic?
Secondly, if there is a systemic effect, it's partly because the mortgage holders are themselves highly leveraged and modifying payments they receive only exacerbates that problem.
There are plenty of things states and municipalities can do to disincentivize foreclosure and incentivize lenders to do something different. Like requiring judicial foreclosure proceedings, and scrupulous examination of documents and provide assistance of counsel for free. Or charging the mortgage holder a fee for allowing a home to remain unoccupied. Or requiring a mortgage holder to arrange a temporary place to live for any resident before foreclosing. Servicing arrangements do not require a servicer to robotically foreclose and evict as to every bad mortgage.
Bankruptcy modification is ad hoc in the sense that it only is applicable if a debtor seeks to invoke it. Unfortunately, many of the other proposals are also ad hoc, in the sense that they are not universally available but involve some type of value judgment on whether or not a particular borrower, or type of borrower, is entitled to relief. So there were always be winners and losers, oftentimes in mysterious ways, unless the law is truly universal, and that simply never happens in government sponsored programs with government money involved.
The other benefit of bankruptcy modification is that there is no taxpayer cost--it is a market driven solution.
And, of course, it is not the only solution; the types of remedies proposed by T may be very helpful (with the exception of requiring judicial foreclosure which is a bad market solution that is unnecessary and slow). Also, we are seeing many servicers not robotically foreclosing and several institutions have announced moratoria. But when it comes to actually modifying the economic terms of the deal, it becomes very difficult because of the securitization issues.
Pitt is correct in stating that actual modification of loans in bankruptcy will become difficult because of securitization issues. However, if the loan was between the bank and the home owner and was never sold on the secondary mortgage market, that loan should be able to be modified. It's too bad that home buyers do not deal with their local banks anymore. The whole mess has become complicated. Securitization notwithstanding, receiving a little bit is better than receiving nothing and having a portfolio of REO in bad condition to try to sell. Everyone involved will have to take a bit of a hit.
Well, if you are pushing for cramdown, let's just let it cut both ways. Once home prices start going up in value, why don't we let the lender take all of the upside change in value? Or make it so the lender gets a percentage of any increase in income that the borrower experiences in the future. The simple reason why the social do-gooders is that because the borrower is utterly selfish -- he is willing to hurt the lender financially, but is unwilling to take the same "hit" himself if values reverse. When you sign a promissory note, you "promise to pay." If you need to take bankruptcy for a personal discharge, that's fine. But you shouldn't benefit over and above a "fresh start" discharge by keeping assets, unless you are willing to keep paying for them. There is a sanctity to home loans that Chapter 13 recognizes, in large part because lenders will raise home mortgage rates significantly on all of us if they run the risk of widespread cramdowns. Lenders do not create money; someone has to provide it. Why would an investor put money into the mortgage market if he knows cramdown is likely in most cases? It would be better for him to simply buy a large number of residences and become a slumlord. Is that what we want in America?
Four comments to JPH's post.
First, I did suggest that a mechanism should be provided to give the lender a portion of the upside if the market recovers and the home is refinanced or sold. Cram down is not a giveaway; it's a recognition of economic reality that gives the lender the value of its collateral with substantially lower transaction costs. Future upside recovery of some kind is fine. The reason I suggest that only a portion would be appropriate is that most foreclosing lenders don't hold underwater REO until the value completely returns but instead will sell the asset as soon as possible and write off the deficiency (again, those pesky holding costs and the time value of money rear their heads).
Second, allowing modification of home mortgages in chapter 13 doesn't have to include write down of some portion of the debt. Maturity extensions, interest rate modifications (even including a pay rate and an accrual rate if you'd like with the difference recoverable on sale or refinance), and the like are also possible.
Third, the notion that "cramdown is likely in most cases" greatly exaggerates the extent of what will happen. Bankruptcy is no day at the beach as most debtors find out. And. cram down (or, more accurately the threat of cram down) is ever present in commercial loans and all other personal loans (with the new exception of recently purchased cars) and until the current credit squeeze, there has been no lack of money ready to fund these loans--and once things settle down, the same will be true in the future.
Finally, opponents to mortgage modification always assert that the rates for the rest of us will go up--but there is little hard data to suggest that this is true and there is data on the other hand to suggest that it is not.
"Several of the posts suggest that the write down of mortgage debt in a Chapter 13 bankruptcy would be arbitrary. This is not correct. The idea would be, like any cram down, to provide the creditor with the present value of its collateral, paid over time at a market discount rate." Except that it doesn't provide the creditor with the present value - it provides a promise to pay a loan equivalent to the present value, from the same person who failed to keep their last promise to pay.
From an economic standpoint, there is no difference between cash and a stream of future payments at an appropriate interest rate. In any event, the lender retains its lien so that if the debtor defaults again (which is more probably more unlikely than it was the first time), the property can be foreclosed at that point. The other protection against arbitrariness and a new default is that the plan can only be confirmed if it's feasible and in this context that means that the debtor demonstrates that enough money will go into the plan to make the required payments over the 5 years. If not, there is no cram down.
The bottom line here is that you have a failed mortgage--what do you do with it? Foreclose and turn it into a bank owned repo with all the attendant costs, not only to the bank and the debtor but also to the community through depressing prices in the neighborhood? Or do you rewrite it, stabilize values, keep people in their homes and avoid the financial and societal costs of foreclosure?