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Bill Alters Bankruptcy Code to Help Homeowners
By Editor | October 22, 2007
by Chris Arnold
The House Judiciary Committee
is set to vote on a bankruptcy bill that housing advocates say could
help those in danger of losing their homes to foreclosure.
Lawmakers
are considering changing the bankruptcy code to offer greater
protections for homeowners at a time when foreclosure filings are at
their highest level since the Great Depression.
The bill would let bankruptcy judges stick their gavels in the gears of the lending industry, blocking foreclosures.
The
judges would gain the power to restructure home loans, for example, by
forcing the lender to lower a borrower’s interest rate – say from 12
percent to 8 percent. They can’t do that right now.
If they are handed the authority, though, more homeowners who are filing for bankruptcy might be able to stay in their homes.
That’s
what Cheryl Roberson needs. She bought a house in Ypsilanti, Mich., in
1993 for herself and four children after a divorce.
“This
is my first home and I bought it all by myself. I was a divorcee,
single parent, and it was a wonderful accomplishment for me,” Roberson
said.
The Subprime Trap
She
has a solid job as an executive assistant at the University of
Michigan. But a few years ago, she refinanced into a subprime loan. It
adjusted up to 12 percent last year, and Roberson can no longer afford
it. She has received foreclosure notices.
“It’s
been very emotional. It’s been very stressful,” Roberson said. “I tried
to talk to my older daughters to tell them, ‘Look, they may take this
house away from me.’ ”
Roberson’s
lender, a company owned by Morgan Stanley, offered to reduce the amount
she owes by about $20,000. But Roberson said the company won’t lower
her high interest rate.
Treasury
Secretary Henry Paulson has urged large companies in the mortgage
business, such as Morgan Stanley, to help homeowners by refinancing
their loans. Doing so would help the companies as well.
Crippling Markets, Homeowners
Delinquencies,
especially in the subprime market, set off shock waves in global
financial markets earlier this year and forced many mortgage companies
to declare bankruptcy. Even the biggest lender, Countrywide Financial
Corp., was crippled. It received a cash infusion from Bank of America
to stay afloat, and recently said it would slash as much as 20 percent
of its work force to lower costs and deal with defaults. It expects new
mortgages to fall about 25 percent next year.
Some
2 million consumers are expected to face an increase in mortgage
payments within the next two years as their adjustable rate mortgages,
obtained with low introductory rates, reset higher. The loan industry
takes a $50,000 hit with each foreclosure. So helping the 2 million
consumers in danger of losing their homes with refinancing is as much
to the lender’s advantage as the borrower.
Roberson’s legal aid attorney, Paul Sher, said the bill in Congress would be a huge help for borrowers like her.
“It
could be tremendously beneficial to her because the judge could have
kept the mortgage at the initial rate that she could afford,” Sher said.
Adjusting Loan Interest
In some cases, the judge could do a so-called “cram down” on the loan amount.
“The
mortgage could be limited to the value of your home. So if your home is
worth $160,000 but you’ve got $220,000 in mortgages on it, well, the
mortgage would be $160,000 and the other $60,000 would become unsecured
debt,” said Rep. Brad Miller, a North Carolina Democrat.
Unsecured debts are not backed by the pledge of specific collateral.
But
Miller cautioned against bailing out people who were irresponsible. “If
somebody bought more house than they can afford, a bankruptcy court’s
not going to help them,” he said.
Further,
the judge will have to set an interest rate that still will be a couple
of points above what a borrower with good credit could get, Miller
said, noting that it still would be fair.
“What
will happen in bankruptcy is a lender will end up with a mortgage they
should have made in the first place — not a predatory mortgage,” he
said.
One housing advocacy group
estimates that the bill could help up to 600,000 people stay in their
homes, most of whom aren’t expected to wind up in bankruptcy court. The
change would instead prod lenders to cut better deals with the
borrowers.
‘An Unmitigated Disaster’
The lending industry expressed disfavor with the idea.
“It’s
an unmitigated disaster,” said Larry Litton Jr., CEO of Litton Loan
Servicing, which manages more than $50 billion in loans. “You start
giving bankruptcy judges the ability to go in and modify loans, and
there’s no control over that. We don’t like it at all.”
Gary
Siponairee, a vice president with Chase, agreed: “It’d be horrible.
You’re going to cut out the whole segment that you’re trying to help.”
He was referring to borrowers with lower incomes and lower credit
scores.
Industry watchers said the risk
of a judge intervening in the future would force lenders to insist on
larger down payments and tighter standards.
They say what Congress needs to see is an industry working to help borrowers without added regulation.
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