By MITCHELL SOMMERS
I deal numerous times a week with people struggling to make a mortgage payment, or sometimes multiple mortgage payments, trying to save their house, and I frequently hear the same thing. It goes something like this: “Can I change the terms of my mortgage? Wouldn’t make sense to adjust the mortgage rather then have the bank take back one more house in an awful market?”
It would make sense. It’s frequently not possible. Bankruptcy law does not allow you either to adjust either the interest rate nor reduce the principal to reflect the actual value of someone’s primary residence. If you try to do that outside of bankruptcy, basically you’ve got two options: a) Ask the lender directly for a modification, or b) apply through the government sponsored Home Affordable Modification plan, or HAMP.
The HAMP program, at it’s best, can provide modest, though not spectacular relief to homeowners. I’ve seen it knock a few hundred dollars off monthly payments. For some, that’s barely enough. But for many, especially those with seriously upside mortgages (as in, mortgages worth way more than the house is work), or who can’t get the mortgages reduced enough to make a difference even if they qualify for assistance, HAMP isn’t very helpful.
The numbers bear out my experience with applying clients through the program. According to a June 21, 2010 Huffington Post article, “More than a third of the 1.24 million borrowers who have enrolled in the $75 billion mortgage modification program have dropped out. That exceeds the number of people who have managed to have their loan payments reduced to help them keep their homes.” I can’t say I’m surprised.
And that doesn’t count the horrible process involved in the application itself. Again, my experience in guiding clients through it has been more labyrinth than flow chart. I’ve seen lenders lose documents repeatedly. I’ve seen them ask for documents, then ask us why we sent those documents in the first place. I’ve seen lenders ask for things at the tail end of the process that they’ve never asked for the entire way through.
Some lenders have blamed the government’s regulations and complexity for the problems, but I’ve seen the same kinds of issues crop up in the lenders’ own, non-HAMP sponsored programs, also, so I don’t buy that as the reason.
There is a way to make a real difference in foreclosure numbers, however. Allow bankruptcy judges to do what are called “cramdowns”, or reductions of interest rates, payment terms, and principal balances in order to keep people in their houses.
Under current law, bankruptcy judge can cram down vehicle loans. They can cram down loans on luxury items like boats, They can even cram down the mortgages on vacation homes and rental properties. The only loan they can’t touch are residential mortgages.
Here’s why that needs to change.
First, taxpayer dollars won’t be needed. Bankruptcy judges and bankruptcy attorneys, trained for this stuff, will be the ones in charge.
Second, allowing cramdowns corrects for market failure. The huge size of most lenders, the outsourcing of loan modification departments overseas, and the securitization trusts that have bundled loans together into intricate, hard to untangle packages has reduced the ability of lenders to modify loans even when it makes sense to do so.
Third, allowing mortgages to be stripped down to reflect the actual value of the home, as opposed to the amount of the mortgage reflects reality. There is no rational reason to treat a lender as fully secured when they’re really not.
Finally, this is no free ride for borrowers. If they default on the crammed down mortgage, lenders have the power to file motions to start the foreclosure process back up. Supervision is already built into the bankruptcy process.
There are arguments the other side—the mortgage lending and banking industry—raises against cramdown legislations. The first one is that they should be allowed to handle these themselves. If lenders had showed some signs of being able to do that without governmental prodding, I’d have some sympathy for that argument. But they haven’t. And I don’t.
Second, lenders claim that cramdowns interfere with the contract between lender and debtor. Well, yeah. But that’s kind of the purpose of bankruptcy.
Finally, lender claim that if cramdowns become the norm, that the costs of lending for single family primary residences will rise. They cite the fact that second homes and multi-family residences have higher interest rates as proof of that. That allegation is open to some serious dispute, since second homes and rental properties historically have higher default rates and are generally riskier loans.
But so what? Part of the reason we are in this mess is because of loan practices that didn’t reflect borrowing costs. Not everyone can afford a house. And increases in interest rates, or increases in down payment amounts, or increases in documentation that reflect legitimate risk assessment aren’t necessarily bad things.
Allowing cramdowns will not solve all the financial problems in front of us. But it will make a dent in at least one of them in a way that will not require an outstretched hand either to the government or the banks. There’s a lot to be said for that.
At least one bank, Bank of America, has gone on record as supporting, at least a limited way. Barbara J. Desoer, president of Bank of America Home Loans, stated in a congressional hearing to Rep. Brad Miller (D-NC), one of the leading proponents of cramdown, that “As we’ve gone through the lessons that we’ve learned with modifications and other programs, there probably is some segment of borrowers for whom that would be an appropriate alternative.”
Unfortunately, it will take more banks to come to that conclusion because, as we all know, neither Congress nor Obama will ever get behind this concept unless the nation’s banks do. And that should surprise nobody.