There has been a "foreclosure prevention" idea that has been kicked around for awhile now. It is to allow bankruptcy judges to alter mortgage loan terms and even to reduce a borrower’s principal balance. I have not seen a short, concise name for this suggested mortgage "cram down" program so I would like to suggest one of my own: MALPRACTICE
MORTGAGE
ALTERING
PRINCIPAL
ADJUSTING
CHANGING
TERMS
IN
CERTAIN
EVENTUALITIES
An MSNBC article stated yesterday: [Thanks as always to L!]
A bill to give judges authority to alter loan terms for primary residences may be the quickest way to arrest the housing market’s collapse.
This is a surprising statement, as one would assume that MALPRACTICE is only in case of bankruptcy. The vast majority of foreclosures do not involve bankruptcy. Additionally, there is still a large segment of the housing market that is not in foreclosure. The housing market has collapsed due to oversupply, not because judges have been unable to modify loans. MALPRACTICE might allow individual borrowers to stay in their homes, but it would not slow the fall in home prices, help bank balance sheets or address oversupply. Nevertheless, MALPRACTICE has advocates in high places. According to the Los Angeles Times:
The Obama administration has recently been more specific in supporting one foreclosure prevention measure viewed by backers as among the most powerful tools to help distressed borrowers, but long opposed by most lenders. It’s a proposal to allow bankruptcy judges to order banks to reduce the principal that people owe on their homes.
President Obama has said he supports such reform. Most mortgage bankers oppose giving judges such power, saying it would lead to higher mortgage interest rates. But fair-housing groups say it would prevent hundreds of thousands of foreclosures.
The L.A. Times seems to believe that opposition to MALPRACTICE is dwindling:
Industry opposition to the idea has faded recently, as the National Assn. of Home Builders said last month it would remove its opposition, and this month, Citigroup Inc. said it would back such bankruptcy reform.
MSNBC however believes that opposition is mounting:
Most Democrats in the House and Senate support that plan. President Barack Obama told Democratic leaders Friday he also backs it, according to a Senate aide who was not authorized to be quoted by name.
But 10 groups representing the lending industry and other businesses are fighting back fiercely. Several have engaged portions of their lobbying machines to stop the legislation. The groups spent $83 million in lobbying on multiple issues in 2008, a figure that shows the power of the banking and investing industry and their business supporters.
As the MBA points out however, MALPRACTICE could backfire:
The chief lobbyist for the Mortgage Bankers Association, Steve O’Connor, said new homebuyers would end up paying higher interest and bigger down payments if lenders are saddled with the risk that a judge could change mortgage terms.
"We’re going to defend the industry" against "bad public policy," O’Connor said.
The association’s 23-member government affairs team is trying to persuade lawmakers to kill the bankruptcy legislation. The team includes six lobbyists and nine policy experts who double as lobbyists, said O’Connor, senior vice president of government affairs.
The bankruptcy solution would not cost taxpayers money, as would mortgage modification programs that could become part of the government’s huge economic bailout package. But it certainly would harm the bottom line for lenders and investors holding mortgages.
I’m with O’Connor on this one. Bankruptcy judges are not experts on home values, and there are a number of unanswered questions. Should the principal be reduced to market value, or to what a borrower can afford? What if market values continue to fall, how likely is this borrower to continue payment? How will this reduced principal affect neighborhood comps? Since the vast majority of foreclosures do not involve bankruptcy- will this mean that this program will have little affect on the foreclosure rate, but will discourage investors in the mortgage market even further?
Like most of the other programs out there intended to "stabilize" the mortgage market, MALPRACTICE is more likely to do more harm than good- but that won’t stop government from giving it a shot.
Twist,
The main thing that bothers me about the rhetoric I hear is this spiel about how we must maintain house prices. The fundamentals do not support that.
Metro-
That bothers me as well.
The government seems determined to make sure that we have a way of borrowing money to keep the economy going. To do that we need collateral and high home values. We need the banks to not unwind their leverage. This is simply not sustainable.
In a world where housing is inexpensive, Americans can rediscover disposable income. We can save to buy things and run off of cash flow rather than our HELOCs. Granted we won’t be spending at the rate we did in the heady days of the housing insanity, but it’s a more sustainable business model.
I agree with Peter Schiff- let the home prices fall. It’s a painful, but necessary, step to recovery.
There doesn’t seem to be one person in the government that has any idea how to fix this. I was talking with a co-worker the other day and we came up with a PLAN. Our arithmetic wasn’t thought through that much but what we came up with was: Take all the intervention money, total it, and divide by all taxpaying households. Our number came to $43,000. Issue checks to all and watch our economy soar. The only thing missing from our conversation was drugs and alcohol. But it sounded just as sober as this silliness. Igor thinks I’m clueless.
I have the dissenting opinion here. The issue of cramdowns has been used for years in bankruptcy it was removed by great pressure by the banks in the Bankruptcy Reform Act of 2005…. hmmmm… about the same time they lowered the lending standards and drops tons of toxic loans in the economy.
Fact is, bankruptcy courts are very well equipped to deal with cram downs, values and making sure that consumers can afford the payments on the modified loans. If they can’t afford it, their plan cannot be confirmed. I suggest you look deep into the requirements of filing a Chapter 13 case today and you will see that their is more fiction than fact in your piece.
Dpereira-
I don’t disagree with you on that point, and you’ll note that I concede that this may benefit individual borrowers. My issue is that what’s good for the goose may not be good for the flock. [Yeah, I just made that one up.]
It’s tough enough for experienced appraisers to evaluate home values these days- I really doubt judges will do better. Here’s one of my concerns. Let’s suppose a realtor bought a house with a $500K mortgage back when the market was flying high. Now that the market is down, the realtor can only afford a $90K mortgage, but comparable homes in the neighborhood are now worth $375K. Should a judge really be allowed to drop the mortgage down to $90K to keep this guy in his house? Then there’s the question of how doing this benefits the greater market. What possible benefit could this be to anyone other than this particular borrower?
Again, I haven’t seen hard numbers, but when I made a cursory search of a couple of sources, it looks like only a small percentage of people facing foreclosure are declaring bankruptcy. Even if this legislation passes, it will do virtually nothing to “save” the housing market, and like other bailouts being considered, will do more harm than good.
twist -
I dunno..
1) it doesnt use taxpayer money
2) only a tiny percentage of people facing foreclosure are affected
3) it lets the people in charge feel like they’re accomplishing something, which prevents them from attempting other things
Since no one in charge will do the “right” thing and let prices go down to where they should (as if they can stop it anyway), maybe we count this as the closest thing to a win as we can get?
If this passes, this will back fire. You will see a lot of lawsuits for the people paying a mortgage on their house for a value of 375K when the same house next door is only paying a mortgage for only 90K. Either drop everybody’s mortgage down to 90K or forclose on the person who cannot afford the mortgage.
Should somebody who secured a loan on a 100,000 dollar car, get it reduced to a 20,000 loan because now they cannot afford it? Should somebody who secured a loan on a 20,000 dollar car get it reduced to 5,000? Where does this end.
Igor is right again this is loony.
i agree with surak…..unless this could somehow lead to a judge writing down my Cap One card by 80%….in which case I’m ALL for the plan!!!