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Bankrolled But Bankrupt: The Senate Fails Homeowners Again

 
 
Reply Sat 2 May, 2009 09:54 am
Posted May 1, 2009
Bankrolled But Bankrupt: The Senate Fails Homeowners Again
by Harry Moroz - Huffington Post

As the economy and the housing and job markets worsen, middle-class households continue to lose equity in their homes and are less able to afford their mortgage payments. The difficulty is compounded for those locked into predatory mortgages with high interest rates. The federal government and the mortgage industry's continued failure to address the foreclosure crisis adequately could result in as many as 8.1 million foreclosures by 2012. Despite widespread calls for action to confront the crisis, foreclosures increased 81% in 2008. Voluntary mortgage modifications by lenders and banks, encouraged by policymakers in place of comprehensive federal action, have failed to make mortgages more affordable and prevent widespread foreclosures.

The Senate had an opportunity to address the foreclosure crisis yesterday by adopting the Helping Families Save Their Homes in Bankruptcy Amendment, which authorizes federal bankruptcy courts to modify the terms of mortgages on certain primary residences. Influenced heavily by the banking industry, they balked.

Bankruptcy law currently bars modifications on primary residences, while allowing modifications for vacation homes, family farms, and yachts. The amendment would permit bankruptcy courts to restructure the debt on home mortgages by reducing the principal owed, extending the repayment period, and reducing interest rates. Under the bill, eligibility is limited to homeowners with mortgages originated before 2009 that are worth less than $625,000, 60 days delinquent, and subject to a notice that a foreclosure may be commenced.

Extending the same bankruptcy protections to primary residences that currently apply to luxury yachts and vacation homes is not only fair, but would reduce foreclosures by about 20%, according to Credit Suisse, and benefit about 800,000 households, according to the Center for Responsible Lending. Strengthened bankruptcy protection is also beneficial to middle-class families who are not themselves facing foreclosure: the 2.4 million subprime foreclosures that the Center for Responsible Lending predicts will occur in 2009 will result in a $352 billion decline in property values for homes in neighborhoods surrounding those foreclosures, with an average decrease in property value per home of $8,667.

Preventing foreclosures in those neighborhoods will keep property values up, benefiting all homeowners. Indeed, an analysis by the Center for Responsible Lending found that similar legislation would avoid 600,000 foreclosures and thus maintain $72.5 billion in wealth for families not facing foreclosure. Modification of mortgages in bankruptcy will help maintain property values, while keeping middle-class families in their homes, limiting the self-reinforcing spiral of foreclosures and falling home prices.

Critics of modifying primary mortgages in bankruptcy worry that interest rates will rise as a result, that the federal government is bailing out irresponsible borrowers, and that the provision will encourage bankruptcy, overwhelming bankruptcy courts. None of these criticisms is valid.

Restricting eligibility to current mortgages in danger of foreclosure means that future mortgages will not qualify for modification. Thus, lenders will not raise interest rates on future mortgages based on the risk of modification in bankruptcy. Indeed, research demonstrates that mortgage markets (and interest rates) are not, in fact, influenced by the risk of bankruptcy modification. Further, the bankruptcy modification provision will protect all homeowners from the current housing crisis by mitigating house price declines. Foreclosures affect not only the families who lose their homes but entire neighborhoods, as property values decline with the appearance of unkempt properties, abandoned homes, and increased crime. Finally, concerns that the modification provision will incentivize bankruptcy are exaggerated. Not only is the provision limited to mortgages at risk of foreclosure, but bankruptcy itself is unpleasant, damaging credit and subjecting living expenses to court review.

Still, modification of mortgages in bankruptcy will not solve the housing crisis. Further action to address widespread foreclosures - including a moratorium on foreclosures and a mechanism to require modification of mortgages outside of bankruptcy - is necessary. President Obama's Homeowner Affordability and Stability Plan is an important component of such a comprehensive approach, but one whose efficacy is not yet proven.
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BumbleBeeBoogie
 
  1  
Reply Sat 2 May, 2009 10:00 am
@BumbleBeeBoogie,
How the senators voted:

Yes votes were to defeat the amendment. No votes supported the amendment.

http://themiddleclass.org/node/127/votes/senate
0 Replies
 
hawkeye10
 
  1  
Reply Sat 2 May, 2009 10:05 am
the grand plans have not worked as promised so far. The Problem Obama has is that he thinks big but fails to properly factor in Washington corruption and the darth of intellectual capital in government. He bites off more than can be chewed.

Here is the same story about the TALF program
http://www.economist.com/finance/displaystory.cfm?story_id=13579218
BumbleBeeBoogie
 
  1  
Reply Sat 2 May, 2009 10:10 am
@hawkeye10,
Friday, May 1, 2009
Mortgage Cramdown Prospects After Its Senate Defeat
By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, [email protected]

Thursday afternoon's defeat of the bankruptcy mortgage cramdown legislation in the Senate very likely means that it will fall into the background in spite of its passage in the House, at least for a number of months and probably for the rest of this year. The defeat was almost universally expected, especially after the top Senate Democratic leadership stripped it off the broader housing bill with its enticements for the banking industry and made it stand alone in the form of an amendment. But the margin of the loss--45-51, far from the necessary 60 votes, and particularly the fact that a full dozen Democrats voted against it when virtually every Democratic vote was needed, makes it very unlikely that any bankruptcy mortgage cramdown bill could make it into law. This is all the more true in light of the Obama administration's negligible public and legislative support for the provision, indicating that it had decided to pick other battles, and presumably could not be counted on for support in at least the near future.

What's Next

Senator Dick Durbin immediately vowed to try to hang on to a bankruptcy cram down provision in the anticipated conference committee's housing bill, as the House and Senate's bills are reconciled, but the relatively large margin of the loss in the Senate makes this very likely a futile effort. There is a slight possibility of very limited success if the cramdown which came out of the conference was highly restricted, such as applicable only to subprime mortgages--which a number of Senators who voted against it said they would have supported. Sen. Durbin determined early in the negotiation process that such a major narrowing of the cram down benefits would not achieve the desired objectives, but he now has reason to reconsider that, if it is not too late.

In the meantime there will very shortly be, perhaps even by the time this Bulletin is uploaded, a Senate vote on the broader bill, without the bankruptcy provision. It includes two components greatly favored by the financial industry: 1) a huge increase in the FDIC's borrowing authority, which would have the effect of reducing by more than half a proposed special premium that banks would be required to pay the FDIC to help shore it up in the wake of bank failures, saving them $7.7 billion; 2) making permanent the temporary increase in deposits guaranteed by the FDIC., from $100,000 to $250,000. It will have no trouble passing. Then this bill will be reconciled with the already passed House bill which includes the cramdown provision, with the final opportunity mentioned above.

If No Cramdown Comes Out of the Conference Committee
Democrat Tom Carper of Delaware, who voted against the cram down, said "My guess is we're not going to see it again [in the Senate]."

Sen. Durbin was taking the long view after the defeat, clearly trying to be optimistic :

I mean, really, to lose 11 Democrats was disappointing, but, you know, I guess I've gained some ground since the issue last came up. Maybe if the mortgage foreclosures go up dramatically and I call it again next year I can pass it.
Going from 36 votes in favor of bankruptcy cram down a year ago to 45 on Thursday may seem like significant progress, except when considering the large increase in Democrats in the chamber, the change in Administrations, and the phenomenal increase in foreclosures in the meantime. And it is no solace for the hundreds of thousands of homeowners who could have been helped.

Durbin added wryly: "If we fail [at passing cramdown through the conference committee procedure] we’ll wait another year and face a worse crisis and hope that the banks won’t have as much clout.” He concluded: "I'll be back, I'm not going to give up."

The Bottom Line

From a press release from the President of the Center for Responsible Lending, one of the consumer organizations involved in the weeks of negotiations with Sen. Durbin: "The mortgage crisis continues to worsen, and the need for this legislation will only grow. Unfortunately, millions of homeowners and all Americans waiting for economic recovery will pay dearly for this delay."
0 Replies
 
hawkeye10
 
  1  
Reply Sat 2 May, 2009 10:18 am
the only real solution to the death spiral of foreclosure, distress sale, low sales price, loss of value of all property, loss of net worth for Americans, foreclosure......is for the income situation to stabilize. For that we need to job situation to stabilize.

Everybody knows that we have continued massive devaluation of residential and commercial real estate, and that this will in short time cause the next wave of assault on the banks and the borrowing power of the American people as we attempt to prop up the banks with the future earnings of our kids.

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