New Mortgage Modification Effort Starts In Washington
There’s talk in Washington that Citigroup and congressional Democrats have decided to end the abuse of mortgage borrowers facing bankruptcy.
To understand what’s happening here, you have to go back to 2005 when a Republican House, a Republican Senate and a Republican President agreed that the Nation would be well served if bankruptcy judges were not allowed to reduce mortgage debt on prime residences.
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 — a grotesque, misnamed effort designed to effectively assure that no corporation would be denied the right to pay out massive executive bonuses — borrowers facing bankruptcy could not seek a reduction in their mortgage balances unless that had first obtained 180 days of consumer counseling prior to filing for bankruptcy.
Why is this a problem? Because most foreclosures start after three missed mortgage payments — about 90 days. In other words, under the 2005 legislation borrowers would have already lost their homes before they could ever get to a bankruptcy court.
“The practical effect of the current bankruptcy law is that borrowers stuck in unaffordable home loans must cure their defaults and, in addition, make monthly payments on the loans according to their terms or lose their homes. No other creditor in personal bankruptcy or business bankruptcy can leave a borrower in such a position,” says a study produced jointly by the National Consumer Law Center, National Association of Consumer Bankruptcy Attorneys, Consumer Federation of America, National Association of Consumer Advocates and the Center for Responsible Lending.
Alternatively, if you didn’t pay the loan on your second home, plane or yacht then no such counseling requirement exists. These loans can be modified — reduced — by a bankruptcy judge, great news for the well-healed.
The idea that those who lend to homeowners would be subject to the same rules as those who lend to vacation property owners and millionaire yacht captains has greatly offended the mortgage community. They call such modifications “cram downs” as if there was something hideous or unfair about mortgage lenders being treated the same way as any other creditor.
Indeed, The Mortgage Bankers Association says “we remain opposed to bankruptcy cram down legislation because of the destabilizing effect it will have on an already turbulent mortgage market. We were surprised by the suddenness of the announcement and are still evaluating the proposed deal, but we believe there remain a number of crucial issues that need to be addressed.
“Any agreement needs to protect FHA and VA guarantee programs. Today’s announced agreement does nothing to solve that important issue. In addition we believe that this legislation ought to be limited only to subprime loans. We would also want to see a sunset date that limits how long judges would be granted this extraordinary power.
“This legislation would have a significant effect on the mortgage markets and we believe it ought to be subject to the normal legislative process, including hearings and markup. We look forward to working with our members and Congress to address these and other issues.”
Think through the logic of this statement — why it is okay to modify subprime mortgages — a HUGE concession by the MBA — but not other home loans? Has anyone not noticed that vast numbers of borrowers who are now being foreclosed do not have subprime financing? Instead, these are people with option ARMs, interest-only mortgages and loans made with stated-income loan applications.
The mortgage industry invented “affordability” mortgage products to originate more loans, collect more fees and boost corporate income. There is nothing in the national interest which says industry profits are more important than throwing millions of people on the street, a reality now being reflected on Capitol Hill.
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