Todd Zywicki has a great editorial in the Wall Street Journal this morning on why it is a terrible idea to let bankruptcy judges modify mortgages. I have excerpted on small part of it, but if you are in the real estate or mortgage business, this is a must read.
New legislation being forwarded by John Conyers is working it’s way through Congress right now that would allow mortgage modifications by judges. Read the article here and see how scary this could be for all of us.
In the first place, mortgage costs will rise. If bankruptcy judges can rewrite mortgage loans after they are made, it will increase the risk of mortgage lending at the time they are made. Increased risk increases the overall cost of lending, which in turn will require future borrowers to pay higher interest rates and upfront costs, such as higher down payments and points. This is illustrated by a recent example: In 2005, Congress eliminated the power of bankruptcy judges to modify auto loans. A recent staff report by the Federal Reserve Bank of New York estimated a 265 basis-point reduction on average in auto loan terms as a result of the reform. WSJ.com.
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These are interesting points. The last thing we need right now is more uncertainty in the mortgage industry. We do not need BK judges with the help of trustees doing this.
The mortgage companies will definitely pass on this cost to the consumer with added fees, pacts, etc. Not good.
It is interesting to me that the banks object so loudly. They are not lending their own money anymore. And bankruptcy cramdowns will not likely be common enough to have the far-reaching effects that the banks are worried about.
What the banks are really worried about, I think, is the increased leverage that borrowers will have in modifying their loans. Right now, the banks can take a "Take it or leave it" approach to modifications. If the cramdown legislation passes, then borrowers will be able use the threat of bankruptcy to negotiate more favorable terms. While there may be losses, modifications of salvageable loans will occur with or without cramdown or stimulus of federal aid. The question is "On what terms?"
We are not even in the third inning of the mortgage crisis and by doing nothing is far worse than cramdown as home values will continue to fall precipitously. The article you mentioned that if a person sells in 1 year, bank gets 80% of the rise in value, 2 yrs. 60% etc where after 5 years the banks do not get any of the profits… First, I don't think in 5 years there will be any profits so that point is moot. However, I agree that the bank should get more of any appreciation. I think the profit split should be based at the profit to loan value (explained below).
We are in the 3rd inning because of the mortgages that had teaser rates then went up to huge rates and you will see much higher than the current 8% default rate.
I despise WSJ editorials without solutions. I think the judges should be the last line of defense for the homeowner (debtor). Loans first should be negotiated with the banks (including lowering the principle). It should be looked at in a "business sense" and nothing more. It should be in the interest of the bank to get the most value out of these bad loans. For example, say someone bought a house for $500,000 no money down and the house is now worth $300,000. Reduce the principle to the $300K, have the person required to have PMI for the 20% (or $60,000), have the rate be at a fair rate and have any profits be based on the principle to loan value…so if the loan is $290K (if he paid down some of the principle) and he sells for $350K, the bank would get 79% of the increase in value. ($60,000 profit / $290,000 loan). Also (if it is possible legally) have it where the bank takes the property over (with a deed-in-lieu) if the payment falls behind 90 days. This way this saves foreclosure costs AND the banks get the properties relatively quickly.
Failure to do anything will have a much more negative effect. If the bank forecloses on the property, it will likely take a year if not longer to get the property (as the courts are clogged with foreclosures) as well as if the person contests the foreclosure it could delay it another 9 months in "normal" foreclosure environment. The house value is likely to continue to decline as the WSJ editorial offers no solutions so now the house is worth $220,000, with not collecting any money for an additional year (or $2,000+ per month) or $24,000 PLUS foreclosure costs $20K uncontested to $40K if it is contested. Then the house will lay vacant while they have to maintain the property…another $2,000+ per month… At this point the bank will take ANYTHING for the property and after another year (two years total, they sell the house for $180,000)…where they could have had a good loan at $300,000 PLUS getting most of the appreciation.
And if you think this is far fetched this ACTUALLY happened (the only difference is the debtor offered a short sale at $300,000 to a person with GOOD credit and the bank refused… The bank recently sold the property for $179,000 two years and 4 months after the bank refused the short sale offer. So the bank lost $50,000 in payments over those two plus years, $40,000 plus in foreclosure costs, plus $110,000 in decreased value of the home. So in the end, the bank lost $400,000 out of $500,000…where the other solution, the bank would have lost $200,000. Multiply this by thousands and you get where we are…and where we are going with the second wave of foreclosures that are just starting to hit the banks.
So with all the rhetoric in stating just let the banks take them over, then let them…but realize it will be far far worse than renegotiating loans including lowering the principle as the value of the homes will continue to decline precipitously. Principle write-down is just a tool to get things flowing again, and so far the voluntary efforts to do principle write-down has failed. So maybe by having the judges having the ability to cramdown the loans would just be a tool for banks to make banks look at these bad loans in a different light.
The realtor that sold us our home, the banks who accepted our $124,000 down payment, and the title company that finalized the deal, are all complicient in the mortgage crisis.
Anyone trying to achieve great thing sure as “Mortgage Modifications”, good luck. They have no reason to help you, particularly if you are current.
The person who wrote our mortgage was/is a felon. Our attorney tells us there were thousands of these scumbags working in the real state, /mortgage industry.
Perhaps when we see some of them in hand cuffs things will change. For now the sign in my yard says:
“REALTORS, & DOGS, KEEP OFF THE GRASS
I thought the points brought up in this article were about 180 degrees off of reality. If anything, banks would be less likely to write ridiculous mortgages if they thought they were likely to be tossed aside by a judge. Assuming that all of this costs money and time, the article just assumes banks are willing to throw money aside.