Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Revisionist Themes
In taking a comprehensive view of a city, an author sometimes makes observations which differ from the common view. Usually with special pride, sometimes a little sullen.

Whither, Federal Reserve? (2)After Our Crash
Whither, Federal Reserve? (2)

Unwritten Constitutional Modification
It is so difficult to amend the Constitution, we mostly don't do it. Our system is to have the Supreme Court migrate slowly through several small adjustments, watching the country respond. Occasionally we have imported new principles, sometimes not entirely wise ones, adopted without the same seasoning.

Second Mortgages Want to Be First

{Chrysler Logo}
Chrysler Logo

In a bankruptcy proceeding, there has long been a traditional conflict between the holders of first mortgages and the holders of second mortgages. It goes like this: since the holder of a first mortgage gets paid first, his incentive is to hurry up the process and get the money. The holder of a second mortgage, however, only gets paid what is left, so this party will normally wish to stall proceedings in the hope the market will improve and give the second mortgage a better payout. Normally, this sort of predictable dispute is covered by contracts, and in any event, most banks hold both kinds of mortgages and are neutral about what is just and fair. In the current banking crisis, however, the major banks have developed an incentive to favor the second mortgage, so they have a new view of what is just and fair. Four of the largest banks hold a total of $440 billion of second mortgages but have very few first mortgages because they were sold off in the securitization process. The banks mostly retained the function of servicing first mortgages, however, so they now have quite a conflict of interest.

Something like this seems to be going on with the resolution of the Detroit auto makers, with the difference that politicians tend to favor the interest of the auto workers in the bankruptcies because there are more voters to be influenced. And in the case of the auto companies, there are stockholders who will be wiped out by a bankruptcy unless the liquidation of the company assets produces enough cash to satisfy the creditors, secured and unsecured. After all, stockholders aren't creditors at all; they are owners of the company. No matter how things turn out, however, the secured creditors would normally have the first call on whatever is salvaged. So, it's one class of secured creditor against another, or else it is the secured creditors against the "stakeholders", employees or any other unsecured creditor. If the government intervenes, there is the additional issue of the Fifth Amendment of the Constitution, which prohibits the government from the "taking" of private property without just compensation. Representative Conyers of Michigan, whose political allegiance is not in doubt, has introduced legislation to prohibit lawsuits in these matters. So now, the prospect grows of a constitutional clash between Congress and the Supreme Court, over the Constitutionality of such a law which denies due process. So that gets us into the fourteenth amendment, too. If we look beyond the technicalities, the looming clash is between President Obama and Chief Justice Roberts. One of them wants to take money from secured creditors and make it available to someone with more political clout; and the other surely wants to preserve the sanctity of contracts, the rights of property holders, due process, and the right of the Supreme Court to declare contrary laws to be unconstitutional.

Unless someone backs off, the situation would seem to be as monumental as Franklin Roosevelt's Supreme Court-packing proposal. Because -- there is every reason to anticipate a 5-4 vote by the Supreme Court, a 5-3 vote if Justice Souter is not replaced by that time, and strenuous efforts to alter the balance.

Originally published: Monday, May 04, 2009; most-recently modified: Sunday, July 21, 2019

If a bank holds a first mortgage and I hold a second recorded and the bank makes a new laerger loan then the balance to the owner, wipes out the old loan, but the bank failed to pay me off to keep it's first position and just failed to get my approval of the second holder so I think during the time between the payoff and the new loan which was recorded a month after the new loan went into place I think I became the first and I should forclose. Am I missing something here. The bank says it made an error and wants the court to forgive it and keep its first place. Would you pleae give me your thoughts.
Posted by: martin kessler   |   Jul 13, 2014 4:51 AM