The subject of cramdown legislation is widely attended to by consumers and corporate executives alike. Consumers are paying careful attention as the bill, if passed, could give desperate homeowners another exit strategy from serious hardships caused by the worsening economy.
Corporate executives argue that the legislation would result in higher interest rates for borrowers, however, most analysts understand the real underlying concern: serious losses incurred as a result of new judicial powers.
This post is not intended to summarize the state of affairs, instead, this post teases out the serious concerns faced by both parties suggesting a possible solution based on a present judicial practice in the State of Pennsylvania.
Consumer Concerns:
Little has changed since the beginning of the foreclosure crisis. Lenders are still foreclosing in record numbers. Loan servicing companies continue to provide terrible customer service to their clients. To make matters worse, uniform codes for loan modification standards have not been implemented on a nationwide basis. What this means is that consumers are still in the dark when considering the loan modification option, lenders and servicers are still “voluntarily” participating in government programs to incentivize loan modifications and, in my final analysis, the complete leadership vacuum surrounding the loan modification industry has resulted in fertile ground for rampant fraud of the worst kind: fraud perpetrated against families in crisis.
What I see in the cramdown bill is the possibility for the creation of a neutral, third party that will listen to homeowner’s concerns. If you have tried to speak with a loss mitigation department in the last decade then you understand that customer service remains a nebulous concept to banks. Given that shelter, warmth and the concept of home is inextricably bound to our sense of human dignity, I argue that a clear channel of communication with lenders, mediated by a third party is morally justified given our present economic circumstances. As justified as this may be, the limitations of banks need to be taken in to consideration.
Banking Concerns:
If passed, the cramdown bill will most assuredly result in losses for banks, investors and shareholders, that is, at least for the immediate future. To offset losses banks have a number of profit seeking or loss mitigating activities they may implement: (1) further restrict lending; (2) increase interest rates; and (3) increase fees associated with lending; or (4) rely further on government bailout funds to cover future losses. None of these options are positive for consumers in general, however, some of these activities are necessary for banks to continue to operate profitably in to the future.
The best possible solution to avoid serious bank losses would be mandatory mediation with consumers before a judge arbitrarily cuts the mortgage balance to suit what they feel is appropriate. Perhaps this middle ground could be a necessary precondition before a judge gains authority to modify the principle balance of a first position home loan. And just maybe, this middle ground would give lenders the assurance they need that judges won’t brutally punish national lending concerns wholesale.
The Christian Science Monitor ran a story today giving a perfect example of what state’s can do to improve lending and consumer communication:
“Judges there now require delinquent homeowners and their lenders to talk in mediation before the sheriff can auction off a home. Of the 2,300 homeowners who’ve participated, 4 out of 5 still have their homes. Philadelphia’s experience shows what happens when the lender and homeowner know a judge could take a seat at the negotiating table. That’s what bankruptcy judges could do if they were given the power to modify loans.”
“First, the courts don’t get overwhelmed with distressed homeowners. Very few cases in Philadelphia go before a judge. Mediation usually results in an agreement satisfactory to both the lender and borrower. That’s because when judges can compel action, successful out-of-court negotiations follow.”
By demanding banks mediate with consumers before courts will hear foreclosure proceedings, the State of Pennsylvania is forcing communication between lenders and borrowers…a necessary first step that has proved positive. If the cramdown bill passes, I think it would be prudent to require banks and consumers to find a satisfactory middle ground before a judge exercises the right to reduce mortgage balances as they see fit. Should that middle ground be impossible to find, then and only then should judges be given the authority to modify first mortgages. I like this plan for a number of reasons.
First, it forces the lender to speak with the consumer and sets a precedent for legislation in the future that I feel is morally justified: legislation that will require lenders to quickly and efficiently handle homeowner claims especially in times of crisis. Second, lenders would retain some control over their balance sheets if they had the opportunity to negotiate with borrowers before going to court.
If all else fails and the cramdown bill dies on the Senate floor, then I hope that every state in the nation follows the suit of Pennsylvania in requiring mediation between banks and consumers prior to a Sherriff’s auction.
{ 3 comments… read them below or add one }
Just my opinion but I’ve got a different solution. The Senate hurries up and gets the 60 votes they need and joins the house in passing this bill. Then Obama signs the bill and we finally end this foreclosure crap. Sweeping loan mods remains the only solution and if bankruptcy judges is what’s needed; then get this bill passed. Are 8,000 new foreclosure notices still going out everyday? Then screw the banks and worry about the American people!
This cramdown legislation is in the long run both good and bad. The pros are there is a forced mediation before a foreclosure auction, the bad is that the judges can assign whatever they want but in the long run the banks have too agree too these terms and amend them. Also, by doing so it pretty much is going too ensure increased interest rates in the future and stricter lender requirements. The solve all solution is not too just file BK.
We just tried to modify our FHA loan with our lender and were told they aren’t modifying FHA loans as they are insured by the government. The cramdown might be our only way to save our home.