Lenders Baring Fangs to Prevent Foreclosure Help Plans
There are plans to legalize reduction of mortgage balances for borrowers. But lenders are up in arms against it. Two bills are pending before the Congress that would authorize judges to reduce mortgage debts. If it sees the light of day then thousands of borrowers would be saved from foreclosures. But lenders are seeing red. How can judges seize mortgage portfolios? Advocates for the consumers argue that considering the present unique situation such a law is the call of the hour.
The two bills – Emergency Home Ownership and Mortgage Equity Protection Act of 2007 as well as the Foreclosure Prevention Act of 2007 aims to help house owners who are in bankruptcy. To avail of its benefit the borrowers will have to be residing in their houses and holding sub-prime non conventional mortgages like interest only. About 600,000 would then be able to stave off foreclosure in 2008 and 2009. In industry language this policy is known as the cram-down. It will bring down mortgage balances and monthly payments in relation to the decrease of the value of the house.
Governments and consumer groups are frantically persuading lenders to modify loans. They are doing so but the numbers are not sufficient to halt the march of foreclosures. There are more foreclosures than modifications – the ratio being 7:1 respectively. Sub-prime ARM modification ratio is 13:1.
Opponents of the bills argue that these will increase the mortgage borrowing costs for all. Prospective house buyers – that is anyone who applies for a mortgage will be affected. Those who have taken risky loans should now be prepared to face it – one cannot eat the cake and have it too. The borrowers are being indirectly encouraged to continue making bad debts. By forgiving debts the risk is transferred from borrowers to lenders – those who invest in mortgage backed securities. Thus in the long run interest rates will have to go up to attract investors. Everyone’s interest rate will go up by 1 ½% – a $200 month increase on a $2000,000 loan contracted for 30 years at fixed rate. It will drive away investors to other fields as they will fear that this might happen again. The solution is not to forgive debts but to postpone it. The cram-down plan will benefit a very limited few considering the vast numbers at risk. In the country there were 800,000 bankruptcy filings.
