Just How Involved Should The Feds Get?

Thanks to Originator Times for this article... My comments splashed throughout:

WASHINGTON, D.C. – This week the House Judiciary Committee's Subcommittee on Commercial and Administrative Law passed HR 3609, by a party-line vote of 5-4. The legislation would allow bankruptcy judges to modify the terms of a mortgage contract during bankruptcy proceedings. While the sponsors of the bill claim that it would help up to 600,000 people from losing their homes, opponents of the legislation claim that the legislation as written would drive interest rates up for everyone seeking a home loan.

(my comment: Yes, some lenders did take advantage of some borrowers. Yes, Wall Street did allow lower credit standards and in so create even more mortgage lending to be done and even more people get a home where they couldn't have before. Yes, the consumer/borrower should have known what they were signing and whether they could have handled the possible payment increases in the future with their new loan. Yes the fault should be shared by ALL involved... even the borrowers. But, when the government gets involved to this extent, ALL borrowers will end up paying higher interest costs... even the innocent ones that had nothing to do with the current market conditions.)

According to their press release, Rep. Brad Miller (D-NC) and Rep. Linda Sánchez (D-CA) who introduced the bill said the legislation “will treat home mortgages the same as mortgages on investment properties and family farms. The bill repeals a provision that prohibits a bankruptcy court from modifying a home mortgage, but allows a bankruptcy court to modify any other secured debt, including mortgages on other properties.”

By repealing the current provision for owner occupied loans, proponents to the bill claim the legislation will push interest rates on owner occupied properties significantly higher. Currently, typically investment loans carry a higher interest rate to offset the losses sustained by lenders caused by the treatment of these type of loans during a bankruptcy proceeding. Typical investment loans can be up to 1 percent higher than an owner occupied loan.

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"Giving judges free rein to rewrite the terms of a mortgage would further destabilize the mortgage backed securities market and will exacerbate the serious credit crunch that is currently hindering the ability of thousands of Americans to get an affordable mortgage," said Kurt Pfotenhauer, Senior Vice President for Government Affairs and Public Policy for Mortgage Bankers Association (MBA). "The current legislation gives no guidance as to the proper parameters for judges to modify existing loan contracts."

(my comments: This legislation is just plain ugly! If enacted, we will all pay higher rates by at least 1%. We think the market is suffering now due to the subprime mistakes and soon even more by the Alt A problems looming... this will double that problem!)

By allowing judges to rewrite loan contracts and provide whatever relief they individually deem appropriate, HR 3609 would cast doubt on the value of the asset against which the mortgage loan is secured. As a result, lenders and investors would likely demand a higher premium for offering these loans. This premium could come in the form of higher fees, a higher interest rate or the requirement for a larger downpayment, all of which would serve to make the American dream of homeownership less attainable for many Americans, said the MBA

"The reason you only pay six percent on a mortgage loan, where another type of consumer loan may cost ten percent or more, is that the mortgage loan is secured by an asset - the home," explained Pfotenhauer. "When a judge can unilaterally reduce the amount that the lender can get when the home is sold, it devalues the asset securing the loan and the lender and investor will either not fund a loan, or will increase the cost of the loan. Either way, consumers are the ones who pay the price."

(Final comment: You must voice your opinion to your own state's rep's... THIS IS NOT THE SOLUTION!!)