The House Panel passed a measure yesterday to allow bankruptcy courts to modify loans on primary residences for troubled borrowers.
The controversial legislation that has remained stagnate in Washington for more than a year seemed to gain serious momentum as Obama took office and the Democrats gained more power on the Hill.
The new mortgage bankruptcy rules being proposed would mean a huge victory for struggling homeowners who have had little to no protection when dealing with their lenders and mortgage servicers. Loan modifications and mortgage “cram downs” AKA “principle reductions” would be eligible in bankruptcy court and allow judges to whack the values and mortgage balances on thousands and possible millions of homes.
“While bankruptcy reform may not provide all of the answers to this crisis, surely it provides a common sense and practical approach to helping stop the spiral of home foreclosures,” Mr. Conyers said in remarks before his panel.
House Speaker Nancy Pelosi (D, Calif.) said Thursday the measure was a “very high priority” that could move soon, possible as part of the economic stimulus legislation. More likely, it will be attached to other fast-moving legislation, such as a spending bill.
What concerns me and should concern you is the potential for a judicial bottle neck like you have never seen before. I feel that the glut of bankrupt homeowners will absolutely inundate an already over burdened bankruptcy system causing our courts to freeze.
Essentially, the courts would act as mediators on millions of mortgages or what I feel is really mortgage servicing in reverse. I am not sure that everyone is aware of what seems to be an infinite amount of borrowers who need mortgage help.
Bottom line, these toxic mortgages will take several years to individually work out. In court or out of court.
Also, you thought loan modification and foreclosure fraud was bad. Just wait till the mortgage bankruptcy flood gates open for kitchen “table top discount wanna be attorneys” who offer to do these BK’s for 10 cents on the dollar. Because bankruptcy will cost an already strapped consumer and they will be eager to file bankruptcy for pennies on the dollar. Fraudsters will feed on the frugality of our “new” society of strapped and in debt consumers by offering legal services on the cheap.
This bill is definitely needed, but I think these should be safe guards in place to anticipate the avalanche of bankruptcies that will be filed. Maybe a special mortgage bankruptcy court that acts much like a specialty mortgage servicer. I juts feel there needs to be thought on how they will handle the massive volume that will file BK immediately.
More from the WSJ:
“The housing market is already contracting and enactment of cram down legislation would make things even worse by injecting more risk into the mortgage market, making it harder and more costly for people to buy and sell homes,” a coalition of industry groups wrote in a letter to Mr. Conyers and Rep. Lamar Smith of Texas, the panel’s top Republican.
In the letter, they warned that court-ordered modifications would trigger more losses at Fannie Mae and Freddie Mac, which own or guarantee more than $5 trillion of U.S. mortgages. Those losses would flow through to the U.S. government because it has agreed to pump money into the firms to keep them solvent.
Industry lobbyists also argued that mortgage servicers would shun federally insured loans because, despite Mr. Conyers’ changes, the legislation doesn’t protect such loans from being crammed down by the courts.
Several GOP amendments to limit the scope of the bill failed, including language to require borrowers to complete credit counseling before receiving court-ordered modifications.
The panel rejected amendments to limit cram downs to subprime and other non-traditional loans. An amendment to limit court-ordered loan modifications just to mortgages originated during the subprime heyday also failed.
Republican Barney Frank is pushing his housing bill that would fast track FHA’s Hope for Homeowners refinancing program. Frank’s bill also would call for a permanent increase in FDIC’s consumer protection insurance to $250,000.
The bill would also provide additional clarity to protect servicers from investor suits when conducting loan modifications.
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