Mortgage Lenders Still Hate Bankruptcy And Consumers

I have got to admit that I do not now, and I have never, understood the argument by mortgage lenders that their debt is so different that it should avoid most of the scrutiny of the bankruptcy courts and system in this country.  In fact, I would argue that with mortgages now being marketed and sold in bundles to a larger market place, in which few if any people have authority to consider the consequences of their actions on the individual consumer, that all mortgages should be allowed to be modified in bankruptcy.  You can argue cram downs of principal all day long, but there is not reason that the courts should not adjust the interest rate to something that is reasonable and re-amortize the note so as to cure arrearages.  The days are long gone when some local lender holds the note and has some reason to assist a debtor in avoiding foreclosure when a problem arises.

To that end, there are currently two bills before Congress that would give bankruptcy court judges the authority to reduce mortgage debt, which could save thousands of borrowers from foreclosure.  And, lenders are not happy about the prospect of having judges seize control of their mortgage portfolios. Community and consumer advocates argue that such a move makes sense amid the current mortgage crisis.

The Emergency Home Ownership and Mortgage Equity Protection Act of 2007 and the Foreclosure Prevention Act of 2008 both aim to provide relief to homeowners with subprime loans only in bankruptcy.  It is believed that the passage of these bills would help 600,000 households avoid foreclosure this year and next.

The industry is trying to modify some loans on its own in order to avoid this legislation.  You would tend to think they would not have gone running to President Bush and would not be making this announcement if the industry did not fear this legislation.  However, despite the modifications being made by lenders voluntarily, foreclosures are still outstripping modifications by 7 to 1 on conventional mortgages and and modifications of subprime ARMs by 13 to 1.

The mortgage industry argues that this legislation would increase mortgage borrowing costs, but I tend to believe this is unlikely.  First, this has been disproved by credit card financing, in which borrowing went up and costs went down while the largest number of bankruptcies were being filed.  Second, this risky subprime lending is suppose to be slowing or stopping anyway.  It is an argument that predatory mortgage lenders should be allowed to continue their practices unabated, and that is simply not a good argument.  Third, the industry has trouble avoiding liability from its investors in modifying debt as it is.  Allowing, the bankruptcy courts to do it, takes that responsibility out their hands.

It is interesting because mortgage lenders are arguing that borrowers who take risky loans should take the fall when they fail.  First, bankruptcy is a fall and a failure.  Second, this argument completely underscores that the mortgage industry does not want to take responsibility for making risky loans.  It is a strange argument that it is wrong for borrowers to take out such risky loans, but it is not wrong for mortgage lenders to make such risky loans.

Further, the argument that because these subprime notes are purchased by investors in mortgage backed securities that means interest rates will have to be higher to attract investors is a crazy argument only in that subprime loans already carry an outrageously high interest rate.

This argument also ignores the fact that consumers have choices in the market place.  The interest rates will be driven down by consumers refusing to take out loans containing higher interest rates.

There were 800,000 bankruptcies filed last year.  Many of these already included housing issues.  It is not likely that allowing the bankruptcy courts to adjust the interest on subprime mortgages only is going to greatly increase the number of bankruptcies filed.  It will allow the bankruptcy courts to mediate and offer consumers, mortgage lenders and communities real solutions for this mortgage and foreclosure blight facing our country.

Comments

[real estate investing group]

The Associations that the PayDay Advance companies belong to are not prepared to assist in protecting the consumer either. They state that the members have agreed to strictly abide by Federal Rules and use these laws and/ or best practices as a guideline but the members are publicly stating that they do not have to follow those laws and showing by their actions that they do not have to follow the best practices. The lenders only want the benefit of displaying the Association logos which is all that they are...