Bankruptcy Mortgage Loan Modification Bill Needs Modification

[JimofPennsylvan]

Congress is poised to pass legislation allowing bankruptcy judges to modify home mortgages to stem the high flow of mortgage defaults and resulting foreclosures. The overall initiative is an excellent initiative because this will help stabilize the value of mortgage-backed securities on the nation’s banks books helping the banks to sell these assets increasing their cash capital and aiding them in getting back to normal lending conditions and it will help stop the flood of foreclosed properties for sale in the housing market driving down home prices and blocking new home construction demand. However, the specific bill in Congress being presented to do the job has significant shortcomings and needs significant modification or the America people will be getting a lousy piece of legislation here. This current bill being offered is Senate bill S 61 (or the House version HR 200) with the additions, which the bills sponsors made to try to accommodate the banking industry, that the loan modification authorized by the bill will only apply to home mortgages made before the enactment of the legislation, that in order to qualify the debtor before filing the bankruptcy petition has had to have been in contact with the lender about the debtor’s inability to pay the loan and lenders rights will only be affected by major violations of the Truth In Lending Act not any legal violation of the act.

The problems with the actual congressional bill entail the following. The text of the bill calls for restricting lenders rights in bankruptcy as to inappropriate conduct as dictated by “State” consumer protection law (Section 3 of bill S 61). Even if this restriction is limited to major violations of “State” consumer protection law it should be scrapped. Prudence calls for the conclusion if it hasn’t already happened that states are going to go overboard in penalizing lenders for wrongdoing they engaged in during the lending process because, in part, overall the public is mad at mortgage lenders for their large part in causing the nation’s severe recession. Depriving lenders their bankruptcy rights under these conditions is neither fair nor is it good for the banking industry, credit markets, the investment industry and thus the overall economy. Again, Congress should get rid of this state consumer protection provision.

Another problem with the bill has to do with the fact that there is no mechanism in the bill to weed out burrowers who realistically won’t be able to afford the mortgage loan even with the bankruptcy courts modification, too often this specific legislation will result in lenders being strung along for years not getting their rightful payments from the debtor burrower because the mortgage payment on the modified mortgage is still unaffordable. The bill needs such a mechanism. The way the bankruptcy court will handle these mortgage modification is that they will reduce the principal on the loans to the market value of the home – bankruptcy courts call this a cramdown which applies only to secured loans (which is not unreasonable because if the lender foreclosed on the home that is all the lender would get at best) and the bankruptcy court will modify the interest rate on the loan to a fixed rate in the amount of the prevailing fixed rate mortgage rate (S 61 dictates this). If the bankruptcy courts just implement these loan modification requirements for all eligible home mortgages, the nation will still see high rates of defaults among these burrowers receiving these reworked loans which will just prolong this harm on the banking, credit and housing markets. Remember, the current track record in the U.S. mortgage industry is that of home mortgage loans that are modified to try to accommodate the burrower at least half of those loans are in default within a year. The smart analysis seems to be that if the nation wants to see low default rates on modified mortgages than the monthly mortgage payments should be no higher than 31 % of the debtor’s monthly income, seeking to rework as many mortgage loans as possible the nation could responsibly raise that figure 5% points to 36%.

The lesson here is that Congress should put a test in this legislation for debtors to pass to be able to qualify to have their home mortgages modified in bankruptcy. The test should be that if the principal of the loan is made to equal the fair market value of the home and the interest rate is made the prevailing fixed rate market interest rate and the term of the loan is forty years the resulting monthly mortgage payment must not exceed 36% of the debtors current income or the debtor does not qualify for the bankruptcy loan re-modification program.

This legislation should also be modified in the following way. This legislation sets up a goofy way to modify the home mortgage loan in terms of the modification of the length of the loan (See S 61 Section 4(3)(C)(i)). What should be driving the loan modification with respect to changing the term length of the loan is to keep the monthly mortgage payments no higher than 31 % of the debtor’s monthly income so that it is affordable and the nation won’t see high re-default rates. The bill should prescribe that the bankruptcy judge in his or her calculation of the modified loans term start with the remaining term on the original loan and using the new principal and new interest rate calculate the monthly mortgage payment and if that monthly mortgage payment is greater than 31 % of the debtor’s monthly income then recalculate using this 31 % figure as the monthly mortgage payment and the new principal figure as the principal and determine what this calculation produces as the term of the loan and use this term as the new term of the loan unless it exceeds 40 years which in that case the term 40 years should be used.

This bill should scrap the provision requiring the Bankruptcy judge to add a reasonable risk premium to the modified interest rate above the prevailing current interest rate (See S 61 Section 4(3)(C)(ii)). This premium idea is bad public policy it will result in an added financial burden on the burrower, the burrower will end up paying more for the loan. It essentially amounts to Americans that are less economically well off paying more for credit than Americans that are better economically well off on what should be considered an ordinary and necessary credit transaction. It is essentially creating a second class citizen, it is essentially creating a lower standard of living for the burrower that has to pay the interest rate premium. This is not something the Government should be pushing and mandating, the government should be in the business of protecting people’s rights not undermining them.

This specific bill should authorize the bankruptcy judge to modify late fees, late penalties and any other penalties prescribed by the loan mortgage agreement. To not do so undermines the whole idea behind this bankruptcy modification initiative which is to keep the burrower paying the rightful monies due the lender on the loan and stay out of foreclosure. It is counterproductive to allow the loan to have harsh or onerous penalties on the burrower for falling behind on the burrower’s mortgage loan which would likely cause a complete loan default. The bankruptcy judge should be empowered to modify late fees and any other penalty provisions in the loan mortgage agreement to make them reasonable, fair and not excessive.

 

[rainelli]

well hope this will be successful..

 

[juliar]

Thanks for such a nice information.

 

[goldcatt]

Excellent OP. I don't necessarily agree with a 40-year term as a test though. The 40-year term results in lower payments, sure - it also means the principal balance is practically untouched for many years while the creditor makes more in interest and fees from the same money at the same rate than they would on a shorter-term loan.

 

[WillowTree]

yep, the banks get screwed again.

 

[ba1614]

It's the new American way, reward failure.

 

[The Rabbi]

There is zero evidence to suggest modifications actually stop foreclosures. Based on recent experiences about 80% of mortgage holders who got modification still get foreclosed on in 18 months.
Further, allowing judges to change private contracts is a really really bad idea that will drive up the costs of mortgages for everybody.
Foreclose, sell the house, clear the market, get on with life.

 

[editec]

Congress is poised to pass legislation allowing bankruptcy judges to modify home mortgages to stem the high flow of mortgage defaults and resulting foreclosures. The overall initiative is an excellent initiative because this will help stabilize the value of mortgage-backed securities on the nation’s banks books helping the banks to sell these assets increasing their cash capital and aiding them in getting back to normal lending conditions and it will help stop the flood of foreclosed properties for sale in the housing market driving down home prices and blocking new home construction demand.

I don't understand how that will help much to be honest and here's why..

Each bankruptsy will be decided based on the mortagees ability to repay.

So until the court decides, the bank doesn't really KNOW what that paper is worth, does it?

However, the specific bill in Congress being presented to do the job has significant shortcomings and needs significant modification or the America people will be getting a lousy piece of legislation here. This current bill being offered is Senate bill S 61 (or the House version HR 200) with the additions, which the bills sponsors made to try to accommodate the banking industry, that the loan modification authorized by the bill will only apply to home mortgages made before the enactment of the legislation, that in order to qualify the debtor before filing the bankruptcy petition has had to have been in contact with the lender about the debtor’s inability to pay the loan and lenders rights will only be affected by major violations of the Truth In Lending Act not any legal violation of the act.

Yeah, that makes little sense to me either.

Oce again, util the courts decide if some violation occurred, the banks really cannot KNOW what the mortgage might be worth, can they?

The problems with the actual congressional bill entail the following. The text of the bill calls for restricting lenders rights in bankruptcy as to inappropriate conduct as dictated by “State” consumer protection law (Section 3 of bill S 61). Even if this restriction is limited to major violations of “State” consumer protection law it should be scrapped. Prudence calls for the conclusion if it hasn’t already happened that states are going to go overboard in penalizing lenders for wrongdoing they engaged in during the lending process because, in part, overall the public is mad at mortgage lenders for their large part in causing the nation’s severe recession. Depriving lenders their bankruptcy rights under these conditions is neither fair nor is it good for the banking industry, credit markets, the investment industry and thus the overall economy. Again, Congress should get rid of this state consumer protection provision.

I do NOT agree that consumer protection should be scrapped, but I understand your complaints about why this is a dubious response given the state of affairs today.

Another problem with the bill has to do with the fact that there is no mechanism in the bill to weed out burrowers who realistically won’t be able to afford the mortgage loan even with the bankruptcy courts modification, too often this specific legislation will result in lenders being strung along for years not getting their rightful payments from the debtor burrower because the mortgage payment on the modified mortgage is still unaffordable.

I don't believe that the COURTS are QAULIFIED to decide what borrowers can pay, OR what a home is worth, either.

What qualifies a JUDGE to make these decision in the first place?

This is ALSO what is wrong with the recent modification (thank to Joe biden, I note) bankruptsy laws, too.

The Courts will decide which debts the borrower can pay or not? BAD plan, folks\, but one which the credit card compaies dearly loved.

The bill needs such a mechanism. The way the bankruptcy court will handle these mortgage modification is that they will reduce the principal on the loans to the market value of the home – bankruptcy courts call this a cramdown which applies only to secured loans (which is not unreasonable because if the lender foreclosed on the home that is all the lender would get at best) and the bankruptcy court will modify the interest rate on the loan to a fixed rate in the amount of the prevailing fixed rate mortgage rate (S 61 dictates this).

Well, that seems to have some merit to me.

At least in terms of what rate the Judge will decide, his imposed rate will have some relationship to the rates that exist at the moment.

If the bankruptcy courts just implement these loan modification requirements for all eligible home mortgages, the nation will still see high rates of defaults among these burrowers receiving these reworked loans which will just prolong this harm on the banking, credit and housing markets.

Will it? How do you KNOW that, exactly? For surely it depends on what the original rate was, V what the rate will be, no?

Remember, the current track record in the U.S. mortgage industry is that of home mortgage loans that are modified to try to accommodate the burrower at least half of those loans are in default within a year.

Why? Because the mortgage company was the decider in the rate modification, true? Does it surprise you that the banks cannot brig themselves to write down those mortgage rates to something do-able?

I do not think, based on what you've written so far, that past proformace really tells us how this will work out because NOW the rate of that mortgage will be TODAY'S RATES, not whatever the bank generously decides it will be.

BIG DIFFERENCE there, don't you think?

The smart analysis seems to be that if the nation wants to see low default rates on modified mortgages than the monthly mortgage payments should be no higher than 31 % of the debtor’s monthly income, seeking to rework as many mortgage loans as possible the nation could responsibly raise that figure 5% points to 36%.

That is probably a wiser course, Jim. But how well does that work if the incomes of the people in question only work for minimum wage and are sitting in a house WAY BEYOND their ability to pay?

Isn't that the myth of this meldown? That people who made minisule amouts of moey bought huge very expensive homes?

So let's say I make $25000 a year and I owe $400,000 on that home.

Surely you cannot mean that the courts should set my mortgage payment at 31% or 35% of THAT $ 25,000 salary.

The lesson here is that Congress should put a test in this legislation for debtors to pass to be able to qualify to have their home mortgages modified in bankruptcy. The test should be that if the principal of the loan is made to equal the fair market value of the home

The fair market value that nobody really knows what it is, you mean?

See the problem?

and the interest rate is made the prevailing fixed rate market interest rate and the term of the loan is forty years the resulting monthly mortgage payment must not exceed 36% of the debtors current income or the debtor does not qualify for the bankruptcy loan re-modification program.

Well, I'm on board with the prevailing fixed rate X 40 years part of this formula. That definitely makes sense.

but a fixed rate X 40 years againsT WHAT PRINCIPLE?
Now I come back to my original complaint.

What qualification do JUDGES have to decide the market value of the home?

This legislation should also be modified in the following way. This legislation sets up a goofy way to modify the home mortgage loan in terms of the modification of the length of the loan (See S 61 Section 4(3)(C)(i)).

What should be driving the loan modification with respect to changing the term length of the loan is to keep the monthly mortgage payments no higher than 31 % of the debtor’s monthly income so that it is affordable and the nation won’t see high re-default rates.

You COULD do that....but the the length of time of the mortgage could have to be literally be FOREVER, couldn't it?

The bill should prescribe that the bankruptcy judge in his or her calculation of the modified loans term start with the remaining term on the original loan and using the new principal and new interest rate calculate the monthly mortgage payment and if that monthly mortgage payment is greater than 31 % of the debtor’s monthly income then recalculate using this 31 % figure as the monthly mortgage payment and the new principal figure as the principal and determine what this calculation produces as the term of the loan and use this term as the new term of the loan unless it exceeds 40 years which in that case the term 40 years should be used.

Oh, okay. I see we're sorta on the same page. Yes, if you reduce the payment to 31% of income, and the rate is fixed the elasticity HAS TO BE IN THE PERIOD OF REPAYMENT.

But, if we have been told the truth about how outrageous these homes are compared to people's incomes\?

40 years is not enough time, Jim. 100 years may not be enough time, tiehr.

You know, and I know (because we understand how interest over time really works) that lengthing the time of repay gives one a diminishing reduction in payments.

The difference in payments between 30 years fixed and 100 years fixed isn't really all that much, is it?

This bill should scrap the provision requiring the Bankruptcy judge to add a reasonable risk premium to the modified interest rate above the prevailing current interest rate (See S 61 Section 4(3)(C)(ii)). This premium idea is bad public policy it will result in an added financial burden on the burrower, the burrower will end up paying more for the loan. It essentially amounts to Americans that are less economically well off paying more for credit than Americans that are better economically well off on what should be considered an ordinary and necessary credit transaction. It is essentially creating a second class citizen, it is essentially creating a lower standard of living for the burrower that has to pay the interest rate premium. This is not something the Government should be pushing and mandating, the government should be in the business of protecting people’s rights not undermining them.

PMI is a CLASSIST RIPOFF, I agree.

This specific bill should authorize the bankruptcy judge to modify late fees, late penalties and any other penalties prescribed by the loan mortgage agreement. To not do so undermines the whole idea behind this bankruptcy modification initiative which is to keep the burrower paying the rightful monies due the lender on the loan and stay out of foreclosure. It is counterproductive to allow the loan to have harsh or onerous penalties on the burrower for falling behind on the burrower’s mortgage loan which would likely cause a complete loan default. The bankruptcy judge should be empowered to modify late fees and any other penalty provisions in the loan mortgage agreement to make them reasonable, fair and not excessive.

My concern has bee stated already.

Courts are NOT qualified to do these things and no sigle piece of legislation can be designed to work well in most cases.

They're trying to fix 100,000 broken pocket watches with one smashing blow of a sledgehammer.

I honestly do NOT believe that any piece of legislation is going to resolve the problems that we've created for ourselves.

Our system has been so set up to the beefit of the investor class, and our entire system is so bend toward them, that mere tinkering iwth that system cannot really fix it.

We fucked and fucked and fucked some more with the middle class's ability to make it in this society to the point where millions of us are just getting by (or not!) and the root of this problem is the iherent classism of our society at nearly every turn.

The greed of the well heeled has (once again) reached a stage where it killed the goose that laid the golden eggs.

The geese are the working classes who we've basically been fuckig for the last 40 years.

The mortgage crises is a manifestation of that inequity, not the CAUSE of it.

Go back to that 31% or 35% formula.

The solution is to create a society where that 31% or 35% (remember that's pre taxes, not AFTER taxes!) can actually BUY a home.

Right now?

Well...what is 31% of a family making $51,000 a year?

51,000/12 = $4250 per month (pretaxes)

35% X 4250 = 1487.50.

That means if the API is 5%, they can pay back a 40 year fixed 5% mortgage on about a $300,000 home.

but look, they don't actually make $4250 a month, do they ?

After taxes they actually TAKE HOME about $2975 a month (I fugure about 30% paid in taxes, icluding SSI, ad federal and NO state or local taxes whatever.

See the problem? that 35% rate is too damned high.

AT best a median family income (51,000) ca really afford about a $200,000 home.

And THAT ASSUMES they have NO other revolving out outstanding debts!

What that really means is that the median family income really does not suppoprt the median home price, Jim.

And I still believe that the median family income can really only afford about 25% of their GROSS incomes.

AT BEST, that's what they can afford.

So given the prices people recently paid for their homes, and the fact that they are likely to make LESS moey in the future (assumpig inflation doesn't kick in, I mean) there's no way in hell that the prices of homes isn't going to cotinue crashing JUST LIKE OUR INCOMES have been!







It's nowhere near enough to buy the AVERAGE HOME especially if that family has ANY OTHER DEBTS.

 

[cs43]

As everyone probably knows, that bill never passed. But it looks like some bankruptcy courts have come up with a workaround by conducting mortgage modifications through bankruptcy--they call it mortgage modification mediation. It's not in all states, but seems to be spreading. Here's a link that shows a map of the states where the mortgage modification mediation program is available.