Congressman John Conyers says Loan Modification Can Stop the Foreclosure Crisis
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United States Congressman John Conyers—a Democrat from Michigan who serves as chairman of the House Judiciary Committee—says loan modification can help stop stem the tide of foreclosures. From today’s Wall Street Journal:
This week the House Judiciary Committee approved legislation aimed at helping Americans keep their homes through bankruptcy.
I introduced the Helping Families Save Their Homes In Bankruptcy Act of 2009 to give courts the power to modify mortgages to bring them in line with underlying home values. For families in distress, this is a much-needed reform. And considering the realistic alternatives, it is fair to all concerned.
I have been working on this bill for nearly two years. I believe it represents one of the most tangible and productive steps we can take to limit the fallout from the real-estate depression that has been sweeping the nation. While it is not the entire answer to the economic crisis, it is a common-sense and practical approach to stopping a downward spiral where foreclosures also depress nearby home values and thereby hurt other homeowners. This spiral is not helping anyone — not homeowners, not lenders, and certainly not communities.
Some argue that we are acting too quickly, and that we should delay my legislation to give homeowners and lenders more time to modify the terms of existing mortgages on a voluntary basis outside of bankruptcy.
But the evidence shows that such modifications don’t work. For one thing, many of the servicers who control the mortgage loans claim they are not legally permitted to agree to voluntary modifications. And even when they are legally permitted to agree, their financial incentives are stacked in the direction of foreclosure.
As a result, the much-vaunted federal “Hope for Homeowners” program launched in October has been only a limited success. The program is supposed to facilitate new mortgages for homeowners if lenders agree to reduce the amount of money owed on a home to 90% of its assessed value. The program went into effect with the goal of helping hundreds of thousands of homeowners. To date, it has processed less than 400 applications.
To those who claim that my bill will end up harming consumers by increasing the cost of credit, I would respectfully suggest that they are not taking account of the track record of the modern-day bankruptcy code.
For more than three decades, the bankruptcy code has permitted the very kind of court modification we are considering today, for every other form of secured debt, including loans secured by second homes, investment properties, luxury yachts, and jets. For over 20 years, this very kind of modification has been available for home mortgages already — if the home is a family farm. There is no indication that this has in any way increased the cost of credit for any of these kinds of loans.
As for my legislation, we have narrowed it to apply only to existing mortgages. So it will have no effect on new mortgages and cannot impact their cost. This is one reason why Citigroup is now among the many business and consumer groups that support this proposal. It’s also one reason why the Obama administration supports my bill.
Finally, to those who argue that this legislation constitutes some form of “moral hazard,” which will encourage reckless borrowing in the future, I would simply ask them to come to Detroit, my home town.
Detroit has had more than 100,000 foreclosures over the past three years. And the pace doesn’t seem to be letting up. The city has an average of 126 foreclosures a day. Block after block, “for sale” and foreclosure signs feed off of each other, driving down home values, uprooting families, decimating communities, and causing local tax revenue that pays for police and firefighters to plummet. We don’t have the luxury of worrying about hypothetical future moral lessons. We need to stop the bleeding today.
What is happening in Detroit is also happening across the country. Communities in Arizona, California, Florida, Massachusetts, Nevada, Ohio and elsewhere are all facing big foreclosure problems.
If we can spend $700 billion to bail out the brokers on Wall Street, the very least we can do is allow working Americans who are willing to repay their debts as best they can, under court supervision, the dignity of staying in their homes. With one in 10 homeowners behind on their mortgages, and 10 million foreclosures expected over the next several years, the time for meaningful action is now.
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Ralph R. Roberts, GRI, CRS |
“If we can spend $700 billion to bail out the brokers on Wall Street, the very least we can do is allow working Americans who are willing to repay their debts as best they can, under court supervision, the dignity of staying in their homes. With one in 10 homeowners behind on their mortgages, and 10 million foreclosures expected over the next several years, the time for meaningful action is now.”
Your last comment says it all. Our money freely flows to the bznkers and they spend it on themselves with no regard to the rest of the nation. Case in point the $18 billion in executive bonuses given out after they got our bailout money.
Until there is help for homeowners and we begin to stem the tide of foreclosures, a recovery will not be possible.
Congressman Conyer’s bill is on track but does contain some flaws. ONe such flaw is that the lender will participate in the appreciation on the house whose loan was modified.
This from the Natinal Law Network:
” House Judiciary Amends Bankruptcy Act to Include “Clawback”
Posted: 30 Jan 2009 10:27 AM CST
HR 200, the house version of the “Helping Families Save Homes in Bankruptcy Act of 2009,” as reported in Northern California Mortgage Mods, was amended in committee to include a “clawback” amendment. This allows mortgage companies, whose loans are modified by a bankruptcy judge, to share in the appreciation of a house that is later sold by the home owner.
The benefit to the lender will go from 80% of any appreciation in the house’s value during the first year after modification to 20% in the 4th year. Thus the lender, whose loan exceeded the value of the property when modified by the bankruptcy court, will get a wind-fall if the house appreciates and the home-owner sells it.
Without the modification by a bankruptcy judge, the lender would end up with the house in foreclosure. Generally that means that the lender, on average, will end up with about 50% of their loan. With the modification, they rate to get 75% of the loan amount; so is it fair that they end up with 75% and a chunk of the appreciation?
Certainly, giving the lender a large chunk of a home’s appreciation is a disincentive to the homeowner to improve the house. Would you spend $15,000 on a new roof to enhance the value of your property knowing that the mortgage company is going to get 80% (or even 20%) of that additional value?
Like all dramatic changes to existing law, the devil is in the details. Just how this is going to work is not an easy problem. One thing is certain: homeowners need this legislation to save their homes, but it has to be a workable, reasonable solution.”
What I don’t understand is why we need to legislate common sense business practices. Is there a profit motive for lenders to not modify loans that is unseen by everyone?
In an article published on Flippingfrenzy back in March, 2008, I wrote about the common sense of loan modifications as a win-win situation. The article, “Win-Win versus Lose-Lose: Why’s the choice so hard to make?” can be seen at http://www.flippingfrenzy.com/2008/03/02/win-win-versus-lose-lose-whys-the-choice-so-hard-to-make/
Last note: A bankgrupcy judge recently “voided” a mortgage saying that the lender could ot prove ownership and that the original lender had been paid in full for the note therefore there was no debt owed any longer. This is a federal court and the case could become precedence.
I ask again, what is the motive that lenders - actually the servicers and not the real lenders - have? They owe an obligation to the “real” owners of the note - the investor that purchased a share of the note in the securitization?
Ralph, your blog is full of excellent information on loan modifications. I have bookmarked it and will return and refer it to others.
One has only to remember that in a healthy economy, the loans come from the savers and foreclosure is merely a process to correct past excesses on the part of the borrowers. Whenever the government is allowed to meddle in that process, it backfires which it calls “unintended consequences”.
To begin, the term “homeowner” itself is misleading. First, a “home” doesn’t have to be a house. An apartment or a trailer is just as much a home to its occupant as someone who lives in a house. Second, one “owns” something only when he pays up his promised amount of money in the full. Until then he is merely the buyer of the property and the real owner is the person who has put up the money, i.e., the lender and the house buyer is merely his renter.
The two main groups of house buyers who are in trouble are (a) speculators who overextended themselves to flip a house to make a quick buck and (b) those who took out their home equities to spend on luxuries. If the house was a cake, then they have already eaten it and now the government is assuring them that they can have it too.
These asinine legislations of rewarding the irresponsible and punishing the responsible will have extremely derogatory effects. Mortgage money will be increasingly harder to come by because the prospective lender will be reluctant to lend, knowing that the government can change the terms down the road at its will. Also, increasing numbers of formerly responsible buyers will become delinquent on purpose just to qualify for these government handouts.
To make up for the shortfall, the government will turn to the printing press to create funny money which will increase inflation, which will increase its future expenses and debt, which will require more and more money printing, resulting in hyperinflation, which will cause prices to skyrocket, which will make politicians slap on price controls, which will make goods disappear from the shelves and a black market to emerge, which will cause more and more draconian laws including rationing to be passed.
In short, it will be a totally predictable mess for which the politicians will blame everybody else except themselves and reward themselves with a hefty pay raise for their achievement.
My neighbor lied on her orignal mortgage loan and she just lied again on a loan modification sponsored by Fannie Mae. She simply cannot afford a $450,000 house on a $50,000 salary. The house has been in foreclosure twice. Eventually the home will go into foreclosure because the numbers do not add up. Even if individuals are able to afford the mortgage payments now, what happens when something catastropic happens or they enter retirement. They get bailed out again.
When my household is in financial trouble, I don’t keep spending more than what’s coming in. This just digs the hole deeper. Help the homeowner who is responsible. Politicians know these programs set people up for failure but it sounds good and gets them re elected.