The proposal to help at-risk homeowners was simple: allow bankruptcy judges to rework loans (essentially, lower the mortgage principal and payments) to keep them in their homes and out of foreclosure. Sadly, supporters of the plan surrendered and instead focused on CEO pay -- a populist issue that's a distraction from the real problem of empty homes.
Critic sees bailout as 'unfair and ineffective'
"The only way to stop the free-fall of housing prices is to stop foreclosures," Kathleen Day, spokeswoman for the Center For Responsible Lending, warned. "If you don't do something for consumers, this is going to be unfair and ineffective."
The proposal to amend Chapter 13 bankruptcy law (the kind where debtors repay their loans, but buy time and get some discounts) is hardly revolutionary. Under Chapter 13, filers can rework all kinds of loans: car loans, vacation home loans, investment/rental property loans. But primary residence loans are exempt. Struggling homeowners face two choices in current bankruptcy law -- pay every penny or walk away. The limitation stems from a 1970s law that was intended to encourage banks to lend more money to would-be homeowners.
The simplest way to prevent the coming avalanche of additional empty homes -- and thereby make those asset-backed-securities have some real value -- is to prevent people from getting kicked out. It's stunning that $700 billion is about to change hands with no direct plan for keeping them in their homes.
There is the HOPE NOW alliance, set up by Congress this year to encourage at-risk homeowners and banks to renegotiate mortgages voluntarily. By all measures, it's been a failure. Banks aren't answering their phones when consumers call; trusts that service mortgages have perverse incentives in place that make foreclosure more profitable than renegotiated loans.
Allowing modification of home loans in bankruptcy would encourage banks to negotiate new terms, as it would allow the banks to avoid court costs and delays. Once bankruptcy courts set a few price points on modified loans, voluntary participation would likely follow.
The financial industry, which has long resisted modifying Chapter 13 bankruptcy, says that such a change would deal the mortgage-backed securities industry a body blow. Allowing judges to reduce the principal owed on a mortgage -- lenders call this a "cramdown" -- would lower the overall value of mortgage instruments, as a built-in bankruptcy discount would have to be applied, which would, in turn, harm consumers by restricting the flow of credit, banks say.
No sign of 'bankruptcy premium'
But Georgetown’s Levitin published a study last month that indicates that other loan markets are not adversely impacted by bankruptcy modification. There’s no difference in mortgage rates between primary residence loans and vacation residence homes, for example – and there would be if there were a “bankruptcy premium,” he said.
Levitin argues that proposed Chapter 13 bankruptcy changes would in fact be “market neutral.” Bankruptcy judges are well trained in determining consumers' ability to repay a loan, meaning many banks would get 50, 60, or 70 cents on the dollar, up to twice as much as they would realize after going through the costly foreclosure process, he said.
And neighbors would certainly agree that such a home loan modification would be preferable to another empty home.
"The contagion began on Main Street, and it has to be fixed there," said Day, from the Center for Responsible Lending. "You are not going to get at the root of this and really restore the economy until you stop all the foreclosures.”
I am so confused as to why they are asking for a huge bailout to help all the banks sell off their bad debt (cramming down to true market value) but are so opposed to the new bill letting BK 13 judges cram down and adjust rates on homeowners primary homes?
It doesn't make sense to me. They say it's because it will make banks rais their rates for mortgages because the homeowner knows they can just file a 13. They have no idea how hard a deciosn that filing is and how complicated a 13 plan is.
The little guy always gets the raw end of the deal!!
Critic sees bailout as 'unfair and ineffective'
"The only way to stop the free-fall of housing prices is to stop foreclosures," Kathleen Day, spokeswoman for the Center For Responsible Lending, warned. "If you don't do something for consumers, this is going to be unfair and ineffective."
The proposal to amend Chapter 13 bankruptcy law (the kind where debtors repay their loans, but buy time and get some discounts) is hardly revolutionary. Under Chapter 13, filers can rework all kinds of loans: car loans, vacation home loans, investment/rental property loans. But primary residence loans are exempt. Struggling homeowners face two choices in current bankruptcy law -- pay every penny or walk away. The limitation stems from a 1970s law that was intended to encourage banks to lend more money to would-be homeowners.
The simplest way to prevent the coming avalanche of additional empty homes -- and thereby make those asset-backed-securities have some real value -- is to prevent people from getting kicked out. It's stunning that $700 billion is about to change hands with no direct plan for keeping them in their homes.
There is the HOPE NOW alliance, set up by Congress this year to encourage at-risk homeowners and banks to renegotiate mortgages voluntarily. By all measures, it's been a failure. Banks aren't answering their phones when consumers call; trusts that service mortgages have perverse incentives in place that make foreclosure more profitable than renegotiated loans.
Allowing modification of home loans in bankruptcy would encourage banks to negotiate new terms, as it would allow the banks to avoid court costs and delays. Once bankruptcy courts set a few price points on modified loans, voluntary participation would likely follow.
The financial industry, which has long resisted modifying Chapter 13 bankruptcy, says that such a change would deal the mortgage-backed securities industry a body blow. Allowing judges to reduce the principal owed on a mortgage -- lenders call this a "cramdown" -- would lower the overall value of mortgage instruments, as a built-in bankruptcy discount would have to be applied, which would, in turn, harm consumers by restricting the flow of credit, banks say.
No sign of 'bankruptcy premium'
But Georgetown’s Levitin published a study last month that indicates that other loan markets are not adversely impacted by bankruptcy modification. There’s no difference in mortgage rates between primary residence loans and vacation residence homes, for example – and there would be if there were a “bankruptcy premium,” he said.
Levitin argues that proposed Chapter 13 bankruptcy changes would in fact be “market neutral.” Bankruptcy judges are well trained in determining consumers' ability to repay a loan, meaning many banks would get 50, 60, or 70 cents on the dollar, up to twice as much as they would realize after going through the costly foreclosure process, he said.
And neighbors would certainly agree that such a home loan modification would be preferable to another empty home.
"The contagion began on Main Street, and it has to be fixed there," said Day, from the Center for Responsible Lending. "You are not going to get at the root of this and really restore the economy until you stop all the foreclosures.”
I am so confused as to why they are asking for a huge bailout to help all the banks sell off their bad debt (cramming down to true market value) but are so opposed to the new bill letting BK 13 judges cram down and adjust rates on homeowners primary homes?
It doesn't make sense to me. They say it's because it will make banks rais their rates for mortgages because the homeowner knows they can just file a 13. They have no idea how hard a deciosn that filing is and how complicated a 13 plan is.
The little guy always gets the raw end of the deal!!
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