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Dodd dodges meaningful reform

By Holden Lewis · Bankrate.com
Tuesday, October 12, 2010
Posted: 9 am ET

The Senate Banking Committee will hold a hearing Nov. 16 "to investigate allegations of improper and fraudulent mortgage servicing and foreclosure processing."

Sen. Chris Dodd, D-Conn., and chairman of the committee, said in announcing the hearing: "American families should not have to worry about losing their homes to sloppy bureaucratic mismanagement or fraud." Everyone agrees with that. But I doubt that many people are losing their homes due to "sloppy bureaucratic mismanagement or fraud." They're losing their homes because they're not paying their mortgages.

If Dodd sincerely believes that "families should not have to worry," then he should point out that there are few homeowners who pay their mortgages faithfully, yet lose their homes because of bureaucratic bungling. Make your monthly payments, and there is little to worry about. Lose your job, and there's a lot to worry about, but I don't see the Senate doing anything to reduce joblessness.

"I am deeply troubled by recent revelations and allegations of practices by some of the nation's largest lenders," Dodd said. "Regulators at the federal, state, and local levels have a responsibility to uphold the law and protect consumers from unfair foreclosure, and lenders have a duty to not cut corners around the law."

I hope Dodd takes the time to define "unfair foreclosure." Judging by comments from readers, I think a lot of people think it's unfair when a mortgage servicer refuses to seriously consider a loan modification, and proceeds hastily to foreclosure. If Dodd and his colleagues think that's unfair, they should reconsider a decision they made last year.

In 2009, the Senate defeated a proposal to allow bankruptcy judges to reduce mortgage balances for debtors in bankruptcy. As a consequence of the Senate's decision, banks have an incentive to foreclose on homeowners instead of modifying their mortgages. We would have fewer foreclosures today, and more modifications, if Congress had changed bankruptcy laws to allow judges to write off some mortgage debt. I hope someone points this out to the Banking Committee.

Right now, if you owe $300,000 on a house that's worth $200,000, and you're having trouble paying the mortgage, the bank might modify the interest rate or the term of the loan. But the bank is very unlikely to reduce the amount owed. A rate reduction and term extension might help temporarily, but chances are that it eventually would end in foreclosure.

In the above situation, if you could credibly threaten to declare bankruptcy and have a judge reduce your mortgage balance to $200,000, then the lender would be more willing to grant an affordable, sustainable loan modification.

Instead of discussing meaningful policy matters, Dodd wants to talk about "robosigners."

At least the hearing will happen after the election. That will cut down a bit on the political grandstanding.

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3 Comments
Holden Lewis
November 09, 2010 at 10:03 am

They know exactly what they're doing. If you disagree with their choices, you're an anti-business socialist fascist communist elitist.

Green man
November 09, 2010 at 7:34 am

What nerve for the banks to hire hamburger flippers from berger king to be "robosigners."
Did they even know what they were doing?