Mortgage Cramdowns – The End of the Housing Market as we know it?

As you can tell from the title, I am not a big fan of this recently proposed legislation. I come from the side of old school, I guess. This is the side that says when you sign a document that says “Promissory Note” and starts with the line, “I hereby promise to pay”, that the person that lent you the money deserves to get paid back the money that they lent. I also hold on to the belief that most people in trouble today deep down want to make their mortgage payments and do the right thing. Lenders and borrowers have been around for thousands of years and it would not be so if people did not pay back their loans, in almost all cases. We can all acknowledge that there were many mistakes made by nearly every party involved in the mortgage industry but I do not believe that borrowers took out loans not thinking that they would have to pay back the money that they borrowed.

That being said, there are circumstances today that are far beyond anything we have ever seen. There are millions loans that need to be modified to help struggling American families stay in the homes and afford their mortgages. There are situations out there that constitute mortgage fraud and these mortgages should be ripped up like they never happened. However, most mortgages, for better or worse, were made with the lender expecting to get paid back and the borrower expecting to make these payments. I would like to go forward with this working foundation.

This is one of the reasons that I would like to see the power to make these changes be handled through the existing channels – mortgage servicers and the lenders they represent and not through bankruptcy courts and judges. Can these institutions be doing more? Absolutely. Should they be helping more borrowers every day? Without question. However, as bad as things are today, changing the fundamental rules in the middle of the game is not going to help us out of this morass.

A quick review on interest rates – the riskier the loan, the higher the interest rate to be charged. One of the ways to reduce the risk of a loan is to have collateral against the loan – something of value that is available to satisfy the loan if for some reason the loan was not paid back.

One of the reasons that mortgage interest rates remain at such low levels, is that the investors in these mortgages expect the contracts underlying these mortgages to be enforceable. Mortgages are made on the basis of the underlying collateral (the property). This important fact is why the interest rate on a mortgage is much lower than an auto loan (property is better collateral than an automobile) and less than 1/3 of a typical credit card loan (a completely unsecured loan).

From my perspective, the only thing that putting decisions about mortgages into the hands of a bankruptcy judge does is create more and more uncertainty around what actual risk is for a mortgage lender. How can you calculate an interest rate if you don’t know how your mortgage will be treated by a judge in jurisdiction that you are not familiar with?

If risk cannot be calculated, it will have to be higher to account for the uncertainty. Higher risk = higher mortgage interest rates. Higher mortgage interest rates create higher monthly payments and drives down housing prices. As housing prices go down, we see an even further decline in the existing value of outstanding mortgages. The cycle goes on and on. I cannot find any redeeming quality with taking actions at this critical juncture that could drive our current housing market even further down.

We can and should keep American families in their home through foreclosure moratoriums and aggressive loan modifications and outreach programs. I would rather hire (and put back to work) thousands of people to handle borrower requests than to line the pockets of a small number of attorneys that will exploit every loophole of the law without concern for those borrowers that follow and those homeowners that will see their most valuable asset, their home, drop in value.

So my suggestion is that when you reach out to your local congressman or congresswoman, let them know that you want more help from your lenders and your mortgage servicers but that you don’t need or want a bankruptcy attorney to help you save your home.

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