Bankruptcy judges may get to modify mortgages |
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Would mortgage modifications encourage more bankruptcy filings?
Critics have suggested that more flexible bankruptcy laws would encourage disgruntled homeowners to file bankruptcy solely to escape mortgage
payments that were affordable, but that they believed to be onerous. And indeed, consumer bankruptcy filings already are on the rise. A total
of 76,120 bankruptcies were filed in February 2008, a 15-percent increase compared with the 66,050 consumer filings counted in January, according
to the ABI.
The argument that mortgage modification would spur even more bankruptcies was raised and refuted by Rich Leonard, a bankruptcy
judge in North Carolina. Leonard noted, in testimony before a congressional committee, that the precedents of existing bankruptcy cases already
"sharply curtailed" judges' discretion with respect to modifications of other types of debt.
"The idea that we would (or could) somehow willy-nilly give everyone a 40-year mortgage at 2-percent interest is ludicrous,"
he told the committee.
Would 'cram-downs' cause more foreclosures?
The Mortgage Bankers Association, or MBA, also has insisted that allowing bankruptcy judges to modify -- or, to use the group's verbiage,
"cram down" -- the interest rate or principal on owner-occupant residential mortgages would unleash a number of woes. A handout posted
on the association's Web site states that the House of Representatives' version of the bill, would do four things.
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| MBA says proposed bill would: |
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Increase the cost of all mortgages. |
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Increase foreclosures. |
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Hinder refinancing of existing
loans. |
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Harm federal loan programs. |
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The MBA also has claimed that mortgage modifications
would create more uncertainty about home values, which would result
in more risk for lenders and, thus, higher closing costs and interest
rates for homebuyers.
Similar concerns were voiced by Alphonso Jackson, secretary of the U.S. Department of Housing and Urban Development.
"Rewriting bankruptcy laws seems an odd, time-consuming, distant way to help homeowners," Jackson said during a recent
foreclosure prevention conference in Los Angeles. "It will only increase interest rates. And the litigation with such a move will negate
any benefit, except maybe to lawyers and their firms."
Williams scoffs at such concerns.
"The argument that interest rates would go up doesn't
make any sense, and (the MBA has) never offered any proof to support
it," he says.
A recent academic working paper, "The Effect of Bankruptcy Strip-Down on Mortgage Markets," also refuted the MBA's position.
The authors, Adam J. Levitin and Joshua Goodman of Georgetown University Law Center, analyzed current and historical mortgage data to measure
the effects of bankruptcy "strip-down" (another word for cram-down) or modification of residential mortgages. They conclude that permitting
unlimited strip-downs would have insignificant or no impact on mortgage interest rates or mortgage markets.
Outlook for action this year is uncertain
The House Judiciary Committee passed a version of the bankruptcy
bill in December. The companion bill has been stalled for procedural
reasons in the Senate, but U.S. Senator Dick Durbin, D-Ill., the
bill's chief supporter, has vowed not to drop the effort.
Such determination may not be enough to carry the
day since President Bush has declared his opposition to allowing
bankruptcy judges to modify the terms of owner-occupant home loans.
The administration issued a policy statement that says changing
the bankruptcy code in this way would "undermine existing contracts,
leading to contraction in mortgage credit availability and affordability"
and "likely prolong the time it will take the market to recover
from the current downturn."
If Congress and the president can't come to an agreement, the national elections in November may determine whether bankruptcy
courts will be empowered to grant mortgage relief for homeowners.
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