Many bankers who serve agricultural customers remember the difficulties in the 1980s associated with Chapter 12 bankruptcy protection.
Unbelievably, two economists at the Federal Reserve Bank of Cleveland are saying that Chapter 12 didn’t affect the cost or availability of ag credit. In this research paper, they actually use the Chapter 12 experience as an example of one way to address the current mortgage foreclosure crisis.
The Fed’s Thomas Fitzpatrick and James Thomson make the point that family farmer bankruptcy (Chapter 12 of the U.S. Bankruptcy code) was a good thing in that it resulted in bankers “informally” writing down farm loans, didn’t cost the public much money, didn’t burden the federal bankruptcy courts, and led to the recovery of the farm economy in the late 1980s and early 1990s.
Then they make the argument that (based on the positive Chapter 12 experience) homeowners should have a bankruptcy chapter that would allow them to cram down their home mortgages, based on their research on the history of Chapter 12 farmer bankruptcy.
John Blanchfield and Ryan Zagone of the American Bankers Association set the record straight with this rebuttal. Zagone and Blanchfield challenge their version of history (for example they ignore two pivotal court cases, and two important legislative developments) and point out that the 1980s farm debt crisis was a lot more complicated than presented by the Cleveland Federal Reserve. They note that the so-called “write-downs” farmers got from some lenders (USDA and the government sponsored Farm Credit System) in the 1980s weren’t write-downs at all because there were shared appreciation agreements attached to almost every restructuring that was done.
The Cleveland Federal Reserve’s attempt to use the Chapter 12 experience as a road map to solve the current home mortgage crisis is based on a flawed retelling of history that does not provide an accurate review of the 1980s farm debt crisis nor does it provide an accurate road map for solving the current home mortgage crisis.