Keep hammer in anti-foreclosure plan
AP Photo/Jae C. Hong
President Barack Obama’s plan for preventing foreclosures and helping to stabilize the housing market is serious in scope and imaginative in approach — as far as it goes.
The plan, announced Wednesday in Mesa, Ariz., needs a hammer to force an unrepentant banking industry to make deals that protect communities and keep deserving families in their homes.
Millions of homeowners have seen their monthly mortgage payments rise to between 40 percent and 50 percent of their income, often because they signed adjustable-rate loans they could not afford. The president’s plan seeks to reduce their payments to not more than 38 percent — and perhaps as little as 31 percent — of gross monthly income. He’s doing this by appealing to mortgage holders’ self interest:
If they give a little, they will get a lot.
Some mortgage lenders, for example, would reduce their risk of loss on loans if they refinance loans at lower rates. Other lenders would become eligible for government payments and other cash incentives if they make significant concessions in interest rates.
The idea is to reduce monthly payments enough to make them affordable, thus keeping families in their homes and keeping a glut of foreclosed homes from destroying communities and wrecking home values.
And, by the way, lenders could avoid the cost of foreclosure, which generally costs more than working out a loan.
Among those who work with distressed homeowners to prevent foreclosures, there’s consensus that the president’s program represents a drastic improvement in the government’s response to what’s become a genuine crisis.
But the plan suffers from obvious limitations. It does not directly force the mortgage industry’s bottom feeders off the sidelines, pushing them to make concessions on loans with predatory terms rather than pursue foreclosures.
Rather, the incentives focus more on mainstream loans and don’t touch billions of dollars in “toxic” subprime mortgages bundled and sold by Wall Street as mortgage-backed securities.
This represents a huge hole in the president’s plan, one that he proposes to fill by offering consumers relief under federal bankruptcy law. Lenders who won’t work out loans could find a federal bankruptcy judge doing it for them.
Dan Claggett, managing attorney of Legal Services of Eastern Missouri’s consumer unit, sees foreclosure cases involving sharp practices on the part of lenders — unsophisticated borrowers “promised one thing and receiving something else altogether.”
Mortgage holders on such loans typically are defiant in foreclosure proceedings, and existing law provides little leverage to force them to make a raw deal reasonable.
Nationally, legal advocates for home- owners have been turning to bankruptcy courts to get relief for mortgage-strapped clients. Indeed, Legal Services in St. Louis recently received a $250,000 grant to beef up its bankruptcy practice as an anti-foreclosure tool. But it has to work around the edges, with credit card and other consumer debt, because under current law, judges don’t have the power to directly modify mortgages on primary residences.
Under Mr. Obama’s plan, bankruptcy judges would get such power — erasing an exemption the home mortgage industry won with its enormous lobbying influence over Congress. The plan is unpopular with home mortgage holders because it would treat them like other secured creditors — no better, no worse.
The home lending industry is happier with the financial part of the presidents’ program — $75 billion in direct incentives to lenders and another estimated $200 billion for purchasing or guaranteeing mortgages (mainly through Fannie Mae and Freddie Mac) — because it would impose only modest burdens.
The real fight is yet to come. Lenders will fight a change in the bankruptcy law tooth and nail. If Congress kowtows, it would doom thousands of deserving homeowners to foreclosures that could have been prevented.
Congress’ loyalties will be clearly on display. Americans should watch closely.
To the extent that someone was victimized by preditory lenders, there are criminal statutes to deal with them. Wiping out our legal system of contracts is not a good idea to solve a short term problem and bail out irresponsible borrowers and stupid lenders. While this abbrogation of ex post facto might alleviate some short term pain, it will make getting a home loan more expensive and restrictive in the future. Are you going to want to deposit money in a bank at say 3% assuming the bank is going to lend it at 5% but never knowing when a judge is going to exercise his whim to reduce the loan to a rate that is unsustainable? I might, but I will want a higher return for the increased risk. This is going to push mortgage rates much higher. I think we will have another chance to get some of those 18% 30 year CD’s we saw in the Carter era within the next two years.
The authority that would be extended to the bankruptcy court under President Obama’s proposal has long applied with other kinds of secured debt, without the parade of horribles jjk predicts.
So, to suggest it represents some kind of dramatic abrogation of our legal system of contracts is inaccurate. Indeed, it would create parity between home mortgage lenders and other secured creditors — and the practical effect would be to force home mortgage lenders to be reasonable in dealing with their troubled loans.
To date, home mortgage lenders have been thoroughly unreasonable, to the detriment not just to borrowers in trouble but to the communities in which they live and to the national economy.
Eddie,
Define “deserving families”. It seems a little vague to me…..
I would say it’s shorthand for good faith-borrowers who took out a mortgage to purchase a home — not as investors, flippers or speculators — and for whom the possibility of preventing foreclosure is realistic if everyone acts reasonably.
–It always intrigues me how the cry of ‘irresponsible’ comes up anytime we talk about helping homeowners with their mortgage, but helping banks, financial institutions, car companies, etc., etc., is just fine. I have no doubt that there are many homeowners who knowingly and uncaringly got into this situation, but there are millions more who are innocent victims, and they ABSOLUTELY should be helped.
This anti-homeowner attitude is I think in part fostered by the mortgage lenders themselves. More and more I wonder if they have run numbers and decided that they will do better forcing homeowners into forclosure, making their money back through the government TARP program at a far higher rate than they think they will get through mortgage write-downs.
Think I’m wrong? Think I’m a conspiracy nut? Here’s an interesting tidbit: The day after McCain announced during his debate that he would have the government purchase bad mortgages at their ‘reduced’ value, he backed off and said no, they would actually be bought at full face value. THAT SAME DAY it came out in the news that Wachovia Bank (remember them?) had made an $8 million loan to the republican national committee. It just makes me wonder.
I think $1.79 a week is too expensive for a Post subscription. Maybe Congress should force the Post to offer subscriptions for whatever people can afford. And if you refuse, perhaps they could implement regulations requiring balance in your editorial positions, and impose a $500,000 salary cap on your CEO. According to Reuters, the ironically named Miss Junck earned total compensation of $3.8 million in the last fiscal year. Then again, I see that Lee stock just jumped to 44 cents a share on news that its Pulitzer acquisition debt has been refinanced to 2012. Guess I should have bought some stock yesterday.
I disagree. This is throwing the baby out with the bathwater. Unless it can be proven that a lender committed a crime, the contract should stand. This would not stop the government from subsidizing, or buying the loan, however to interfere with our system of contracts, after the fact, is not good for the long term viability of our system. If a lender committed a crime, a judge would be correct to void the contract. Remember, many of these lenders are pension funds, etc. This money isn’t just created out of thin air like the government seems to do. When you reduce principal. you are taking money without just compensation from a private owner and giving it to someone else. Keeping deserving people in their homes is not a good enough reason to “take” without compensation. It is like condemning my home so good families can enjoy a new road and not paying me what my home is worth. I am an investor. I loan money to municiaplities to build things. (I am not a housing lender). I also put cash into a lot of banks. I am going to be seeking a much higher rate of return in exchange for risk. You don’t have to wonder if it is true. This is going to raise interest rates to Carter era rates. Obama is clearly now trying to trash our economy in order to shove more socialist programs down our desperate throats. The market is now at ten year lows.
> The market is now at ten year lows.
Perhaps, but Lee stock is now at 50 cents a share, up 17 cents today. It’s still a little short of its 2004 peak of more than $48 a share, but it’s rebounding!
jjk is pretty much spot on Eddie. I would add that one of the reasons companies don’t always want to refinance is because of the hit they take on their books if they do. They have to report the new value of the home as opposed to the old, which will mean billions in new writeoffs. The DOWs reaction will make this week look like a gentle slide…
reality check - I agree that bailing out AIG or GM or any other company that ran itself into the ground is just as ridiculous as bailing out
some guy trying to flip houses. I am equal opportunity when it comes to responsibility.
By the way, for those people that blame ARM loans for this mess: Did you know that in countries like Australia, Canada, Britian, and others you can’t get fixed-rate mortgages? Only ARMs. Yet somehow people in thoe nations actually manage to pay off that which they agreed to. Amazing, isn’t it?
“…because they signed adjustable-rate loans they could not afford.”
Root of the problem stated right there.
“The president’s plan seeks to reduce their payments to not more than 38 percent — and perhaps as little as 31 percent — of gross monthly income”
7% isn’t going to matter. 25% is typically all a family can handle.
Why just stop at houses? What about cars and commercial property and other types of loans? New cars lose their value right off the lot. I think I want the govt to force my lender to value the loan at less.