Bankrolled But Bankrupt: The Senate Fails Homeowners Again

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.

Follow Harry Moroz on Twitter: www.twitter.com/HarryMoroz

Comments

[flashrob]

the BIG PROBLEM...

historically, Real Estate, like most other INVESTMENTS has been CYCLICAL...but NOT THIS TIME... here's why...

1. "Buying a House" as opposed to renting has been a "sweet deal" for many decades in MOST MKTS.

this is because you put 20% down (or less) and if your house appreciates just 10% a year...well, on a 200,000 dollar house YOU WOULD BE MAKING A 50% return on your investment.

(20% x 200,000 = 40,000 which is your down-payment investment)

(10% appreciation in the annual value of your house x 200,000...means you made a "50% gain on your investment!)

You did much better than MOST DO IN THE STOCK MKT OR OTHER FINANCIAL MKTS...and with CONSIDERABLY LESS RISK!

however, this is a DOUBLE-EDGED SWORD...when Real Estate depreciates YOU LOSE your down payment RAPIDLY and in most cases permanently unless the mkt recovers.

see the rest at:

http://www.andykessler.com/andy_kessler/2009/05/wsj-suckers-rally.html

flashrob

[wiccanwolfess]

Critics say the "federal government is bailing out irresponsible borrowers" -- gee, you mean like we good, law-abiding, tax-paying Americans have been bailing out the banks since last september? Maybe it's time for the little guy to call the banks and tell them THEIR first loan payment is due and payable to we taxpayers!

[poppyphil]

It's so amazingly short-sighted and narrow-minded of the windbags in the senate to have defeated this proposition. Even my 11-year-old knows that the foreclosure crisis underlies the greater financial meltdown. As long as neighborhoods keep getting blighted by more and more foreclosures, people will experience deflating property values. Since, during the bubble, people seemed to derive their sense of financial well-being from their real estate, it makes sense that people in homes with declining values (pressed to the bottom by foreclosures) will not spend. Their sense of financial well-being is shattered. The American Dream, for them, is over.

And their senators failed them in the time of greatest crisis.

Unbelievable.

[Lorianne]

How Big Banks Want to Game the Mortgage Mess

http://online.wsj.com/article/SB124139532998281787.html

[marika]

Why should they bother. They keep getting re-elected since they pay for their campaigns with the hand-outs from the lobbies and the voters keep voting for them again and again. We see all these powered pampered Senators grow old as they get richer and richer.
The Senate is like a retirement home, a luxery one of course, where the voter is an occasional visiter, the lobbies the special care treatment and in home residents.
Except for an exceptional few they need to be thrown out but does anyone ever leave the Senate other than feet first?
We look more and more like a ship in mid ocean, consumed by wood rot and beyond the point of no return.

[msjimmied]

I am not an economist, so pardon my ignorance...some loans going into default happens because the interest rate is adjusted to nose bleed levels. So forget cram down for those, can we just have a limit for mortgage rates? If the value of the home is down 30-50%, the banks are done for anyway..but the lethal combination of higher interest rates and a house value of half what you bought it for? hmmmm...what are the banks waiting for? Armageddon? It's here!

[cadawa]

One of the Democratic Senators stated that the failure of the Senate to provide help to homeowners was because "the banks own congress". You can't buy something if it isn't for sale. That's always been the Democrats problem.
They could have a decent bill but they were worried about their own pay packets.
Waiting till the next election doesn't seem like a good option. The longer they fail to do the right thing, the deeper and longer the recession/­depression will be.

[DebnJosh]

The bill on the senate floor right now needs to pass... the one that states that investors can not turn around and sue if the lender decides to modify the loan. It sounds simple to modify these loans right now, but the lender needs permission from the investors to do this. With these mortgages in securities, MANY people own these loans and are practically impossible to get in contact with, in other words, no one really knows who owns the loan anymore.

[never-ever-give-up]

What the Congress and bankers don't understand is IF WE (THE AMERICAN PEOPLE ) FAIL, they will too. If they do not provide a legal means for people to get relief, people will resort to self help in the form of property abandonment. Congress' decision is a profound betrayal and will assure an increase the number of foreclosed and abandoned houses, decrease tax receipts for local governments and generally increase the pain out here. I hope that the voters will remember their betrayal and vote them out.

I will never forget.

[FreedomBeforeDemocracy]

There is currently a legal means to get relief. Lenders and borrowers have every right to renegotiate the terms of their contracts if there is mutual agreement. In fact, they do it all the time. A short sale is a bank simply willing to accept less than originally loaned in order to make something back on their investment. A "cramdown" simply gives the authority to the government to change the terms without consent.

[Lorianne]

A point not made often enough

[Palemoon]

"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. "

So in other words, the only people being bailed out are the mega-rich. For example, the bill would have protected people making below a certain amount and whose homes are worth below a certain amount. In other words, help for the little guy. No wonder the bill was defeated.

Just think, the people in homes worth more than $1 and making millions per years, have nothing to worry about. The govt is bailing out those people, giving them a free ride on our backs. Plus those people can already renegotiate their primary residence via a loophole and still keep their home, all with the govt's protection of them.

This needs to stop.

[FreedomBeforeDemocracy]

But what are you trying to stop? The government getting involved, or the current way the government reallocates resources against the "general welfare". I agree TARP and the other bailout measures are wrong, but don't forget that it was the big government liberals that made all this possible. If you remember, it was the house Republicans that voted down the first TARP bill (although they lost their guts for the second try). Not that I'm defending Republicans, it was while they were under full control that the government expanded more than anytime since LBJ.

So you can vote against those that didn't support this bill (though I'd do it the other way), but don't forget to vote against those that supported TARP.

[Palemoon]

You left out alot of information that I can disagree with you on. But first, I'll address the "stop" that I am referring to.

The stop I mean, is for the govt to stop acting as if there are 2 sets of laws/rules in this country where there is one set of rules for the elite, and another set for everyone else. That is exactly the mentality that drove the yes votes on TARP and then to shoot down this Durbin bill that would have helped the poorer people of this country. I don't know about you, but I don't have the discretionary cash handy to just go rent someplace to call my "primary home" in order to loophole my actual primary house into more favorable terms.

Also, you neglect to mention that the GOP did a complete flip-flop on their support for TARP based solely on who was President. Funny, they weren't protesting taxes in December, but now they are, why? Nothing has changed except them. Also, they voted for TARP seeing as how Bush created it and the bailout in the first place. It wasn't til the voting on the second round, after Obama became Pres, that they all voted no. ;o)

[sonofsamphm1c]

When I was upside down in my mortgage I continued to make the monthly payment. Bought it for 135, saw it fall to 65 in two years - late 1980s. We were upside down, not unemployed.

It was moral obligation as a human being to stand behind, if at all possible, the commitment I made, so i stood behind it. No problem.

I can sleep at night. I didn't shaft somebody by breaking my promise.

[dcrinaz]

Jbax52 and Talyn530 are right, tell the sell-out Senators what you feel. And I'll make it easy for you!

Here's the online contact forms for the sell-out senators who betrayed American homeowners. Tell them what you think:

Max Baucus (Mont.),
http://baucus.senate.gov/contact/emailForm.cfm?subj=issue
Michael Bennet (Colo.),
http://bennet.senate.gov/public/index.cfm?p=TransitionalSiteEmailSenatorBennet
Robert Byrd (W.Va.),
http://byrd.senate.gov//contacts/index.cfm?ID=54
Byron Dorgan (N.D.),
e-mail: senator@do­rgan.senat­e.gov
Tim Johnson (S.D.),
http://johnson.senate.gov/contact/
Mary Landrieu (La.),
http://landrieu.senate.gov/contact/index.cfm
Blanche Lincoln (Ark.),
http://lincoln.senate.gov/contact/email.cfm
Ben Nelson (Neb.),
http://bennelson.senate.gov/contact/email.cfm
Mark Pryor (Ark.),
http://pryor.senate.gov/contact/
Jon Tester (Mont.),
http://tester.senate.gov/Contact/
Tom Carper (Del.),
http://carper.senate.gov/contact/
Arlen Specter (Penn, a Dem in name only),
http://specter.senate.gov/public/index.cfm?FuseAction=contact.contactform

You also need to call your own Senators and tell them to support bankruptcy reform now and that its defeat in the senate was unacceptable behavior. Tell them to pass bankruptcy reform, cramdown and all, NOW. Here's a way to look up your two senators: http://www.senate.gov/general/contact_information/senators_cfm.cfm

You can reach President Obama at: http://www.whitehouse.gov/contact/

[talyn530]

Thanks...I'm on it!!!

[Tellurider]

WHY WOULD ANYONE THAT IS UPSIDE-DOWN ON THEIR HOME MORTGAGE MAKE ANOTHER PAYMENT--EVEN IF THEY CAN?
In several cities more than 50% of homes are upside down and the latest numbers say that home values are continuing to decline at a record pace with Phoenix being the leader at 20% a month and foreclosures are escalating everywhere.
And, we still have no plan to stop--not slow-- foreclosures which is the root of the problem.
Most experts agree that until the foreclosure crisis is solved there will be no economic recovery.
I think this is scary and getting scarier by the day and Congress and their ineptitude, in-fighting, posturing, hollow words, cronyism, denial, staged press conferences, sounds bits, feigned solemness, bickering, back-biting, may be the most disconcerting part of it all.
I can face the banks, cut back, work two jobs, dig in and fight, but to think that Congress has already cut a deal to sell us out is just too much.
Looks like the plot of Braveheart and the Lords have made a deal with the King behind our backs.
Robert the Bruce: I respect what you said, but remember that these men have lands and castles. It's much to risk.
William Wallace: And the common man, who bleeds on the battlefield, does he risk less?
So, why make another payment on your mortgage even if you can?

[mikefina]

If you are "upsided down" in your home, you are not a homeOWNER. The bank owns the home. If you want to own the home, then pay the bank the amount of money you contracted with them to pay.

[research]

Yeah! Be responsible like AIG's CDS Insurance they couldn't afford to pay.

The Banksters and Hedge Gamblers are getting taxpayer money, then spending large parts of it on Bribing Congress.

This has to STOP.

Publicly financed campaigns, no private contributions over 1000 dollars, from individuals only, no bundling.

See my profile for more bankster busting.

[murphy80]

pure contempt for the taxpayer homeowner and kiss up to the banksters ala Harry Reid

[jbax52]

Talyn530 is right. Until we speak out, no--scream in outrage to Congress and the president nothing will change. I have already emailed all the Dems who voted against this and let my feelings be known to the president and to Harry Reid. Just go to the Senate website--all the contact info is listed there. We must flood them with angry voices until they listen. It's time we the people took back Congress. I am keeping a list of all those who voted against the bill and I will be donating money to their opponents in the next election, and I will NEVER donate to a general Dem. fund (DNC) again--only to individuals who voted to protect the interests of ordinary American workers and homeowners. They will try to do the same for the EFCA and health care measures. If we just sit back and don't do anything then nothing will ever change. We must harrass them until they have no choice but to listen!

[scooperss]

Big word-----AGAIN. Means they've done it before and yet were re-elected.

*sigh*