The Housing Chronicles Blog: Giving bankruptcy judges the power to alter mortgages

Saturday, February 23, 2008

Giving bankruptcy judges the power to alter mortgages

Lenders are furious at the prospect of two new proposed laws that would allow bankruptcy judges to alter mortgages -- including lowering payments and balances owed -- so that people could keep their homes:

Both the Emergency Home Ownership and Mortgage Equity Protection Act of 2007 and the Foreclosure Prevention Act of 2008 aim to provide relief for some home owners in bankruptcy. Only borrowers who live in their homes and hold subprime or non-traditional mortgages, like interest-only loans, would be eligible...

The policy, which in industry parlance is called a cram-down, would reduce mortgage balances and monthly payments based on how much a home's value had decreased.

But opponents say the cram-downs would increase mortgage borrowing costs for everyone...

Cram-down opponents argue that borrowers who take risky loans should take the fall when they fail. Without penalties, borrowers would keep making bad bets.

And forgiving debt transfers risk from borrowers to the debt holders - investors in mortgage backed securities. That means interest rates will have to be higher to attract investors...

Steve O'Connor, the senior vice president for government affairs at the Mortgage Bankers Association (MBA), claims this could add upwards of one-and-a-half percentage points to everyone's interest rates. That would translate into an increase of about $200 a month on a $200,000, 30-year, fixed-rate loan.

"Looking forward, investors will say, 'How do I know this won't happen again, on a larger scale?'" O'Connor said. "Investors have choices in the marketplace and if they see an additional risk, they'll migrate to other securities."

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