Congress - Despite All The Mock Outrage, Banks Still Call The Shots On Bankruptcy Reform

[Median Democrat]

Who said there is no such thing as bipartisanship? The financial industry has been putting heavy lobbying pressure on members of congress to oppose temporarily giving bankruptcy judges the power to modify residential home loans for a primary residence after a homeowner has tried to re-negotiate with the lender. Republicans, of course, are still listening to the banks that they condemn with mock indignation on the cable shows. Likewise, DINOs are still letting financial executives call the shots in opposing this reform.

Ironically, if you have a second home, then it is okay to modify the terms of that loan in bankruptcy. However, most Americans don't have the privilege even when faced with foreclosure. I guess Rick Santelli's attack on the middle class speech had a lot of backing with the financial sector.

http://money.cnn.com/2009/03/01/news/economy/obama_cramdown_plan/index.htm?postversion=2009030109

/snip

But congressional Democrats, who first introduced a bill broadening judges' power two years ago, are running into trouble gathering the support needed to pass the legislation. The House postponed a vote on the measure until early this week after a group of centrist Democrats voiced concerns. And its future in the Senate remains in doubt with many powerful Republicans strongly opposed to the legislation.

The House bill would allow judges to modify loans originated before the legislation's enactment. It would let the courts change mortgage terms to make a loan more affordable, permitting judges to reduce the principal to the property's market value, a step servicers loathe.

The Congressional Budget Office estimates more than one million households would benefit if bankruptcy judges were allowed to modify loans.

Debtors, however, would be required to contact their servicer about modifying their loans at least 15 days before filing for bankruptcy. And the debtor cannot have falsified information when he or she obtained the mortgage.

Trying to drum up support for the measure, administration officials are testifying before Congress and meeting behind closed doors with lawmakers to convince them of the need for the bill, while promising to limit its use.

/snip

[creeksneakers2]

1. Wouldn't this make it harder to get a mortgage?

Is the provision to not discharge obligations created after the enactment of the legislation designed to keep the measure from disrupting mortgage availability?

This doesn't sound fair to lenders to me. If the borrower wants to go bankrupt, he should forfeit his collateral. Then any deficiency could be discharged.

Otherwise, what happens if housing prices go back up? The borrower reaps a windfall at the lender's expense.

[Median Democrat]

2. No, The Lender Is Out Of Pocket In Any Event With A Foreclosure

Currently, the lender can foreclose, evict the homeowner, than the property goes on the market, which depresses home prices. The lender, can then sell the house at fair market value, and take the hit. So, you have the homeowner losing their home, the neighbors suffering a loss in market value, and the lender taking a hit on the difference between the loan amount and the depressed fair market value of the home/

Also, in terms of fairness, the lender is the sophisticated party that appraised the home. The lender also extended a loan to the borrower based on their ability to pay, but often this ability was based on the introductory teaser rate. It is a classic bait and switch that went on industry-wide.

This is why it make sense to allow this limited bankruptcy reform for existing mortgages. Prospectively, regulations should be tightened for appraisal and for loan qualification so that a borrower's ability to pay is based on a 30 year fixed, rather than the introductory rate.

Will this make mortgages harder to get for some people? Absolutely. I think this current crisis is due in part to artificially high prices that were inflated by banks selling mortgages to people who could not afford them or understand them.

Finally, it is a right wing myth that people declare bankruptcy lightly. It ruins credit and does have a social stigma.