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Housing Bill Still Has a Ways to Go

The announcement today that Senate Majority Leader Harry Reid (D-Nev.) and Minority Leader Mitch McConnell (R-Ky.) have reached a basic agreement on the outline of a housing stimulus bill is certainly news. The two leaders don't agree often, and Republicans and Democrats have been attacking each other on this issue for the last several days.

But while the Reid-McConnell deal is a definite breakthrough, the housing package still faces a long road from here to President Bush's signature.

First, while Reid and McConnell have agreed on how to proceed, landmines still await the agreement in the Senate. In particular, Senate Majority Whip Richard Durbin (D-Ill.) will likely push an amendment to allow bankruptcy judges to rewrite the terms of mortgages, a provision that was excluded from the current agreement because of strong opposition from Republicans and the lending industry that helped kill a similar bill in February.

If the bill can clear that hurdle and any other potential poison-pill amendments in the Senate, it still has to get through the House gauntlet. Although House Financial Services Chairman Barney Frank (D-Mass.) has supported some elements of the current Senate package, he was not a party to the Senate negotiations and will surely want to put his own stamp on the bill.

Because House rules so strongly favor the majority, Democrats in the chamber have less reason to compromise than their Senate counterparts do. But a House bill that tilts too far toward Democrats would make a House-Senate conference tough and a veto threat from Bush likely. The best way to avert those outcomes would be for House Democrats to bring Republicans to the bargaining table. And therein lies more problems.

House conservatives have been eyeing the Senate discussions warily, as they fear the worsening economic climate will lead to a flurry of ill-advised regulations rather than a recognition that the market will likely correct most of the current problems on its own. Without having seen the Senate compromise, House Minority Whip Roy Blunt (R-Mo.) warned generally today against any package "that needlessly makes the mortgage market more difficult." And House GOP Conference Chairman Adam Putnam (Fla.) said he feared a "summer-of-an-election-year overreaction."

Now, Republicans know as well as Democrats do that Congress has to do SOMETHING to deal with the current housing crisis. So the momentum exists for both parties in both chambers to reach a deal they can all live with. Just don't expect it to happen too quickly.

By Ben Pershing  |  April 2, 2008; 6:05 PM ET
Categories:  Agenda  
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The Mortgage Bankers Association (the "MBA") and strenuously opposed a provision that would prevent lender from foreclosing sub-prime mortgage and, instead allow bankruptcy courts to modify the terms of these mortgages (i.e. change the interest rate, reduce the principal balance to the true value of the real estate and extend the loan term) as part of a Chapter 13 bankruptcy plan. The MBA claims that, if enacted, this provision would create more uncertainty on the part of lenders and raise interest rates for everyone, not just subprime mortgages. The President claims that such a provision would allegedly unfairly interfere with contracts.

These claims are just plain nonsense, intended to cause ordinary people (and members of Congress) "knee-jerk" reaction

Allow me to set the record "straight".

The bankruptcy courts have always had the power to modify the terms of repayment of unsecured debts (i.e. credit cards, personal loans, medical bills, etc.) and secured debts other than debts secured by real estate that is a debtor's principal residence. That means that the bankruptcy courts have always had the power to change the terms of car loans, boat loans, mortgages on vacation homes and time-share intervals, loans secured by RV's, pawn-broker claims, furniture loans, all commercial loans and any other kind of loans where a security interest in any other kind of real estate or personal property is granted by the debtor as collateral. This provision has been in effect since the enactment of the Bankruptcy Code in 1978, that is, the last thirty (30) years.

In that time, have interest rates in car loans risen or car loans been made unavailable because of record numbers of bankruptcy filings? No, they haven't. Just look for yourself at the rates on such loans at AAA. And it's not just car loans. Notwithstanding the power of bankruptcy courts to modify such non-residential mortgage debts, for the past thirty (30) years we have seen a huge expansion in the amount of consumer and business credit available to the public in general. So both the MBA and the President are just blowing smoke in the faces of the American People on this issue.

But that does raise the question of what would happen if bankruptcy courts were given the power to modify residential mortgages in Chapter 13? Let's think about this logically. First of all, the subprime mortgage lenders would be prevented from continuing their foreclosure actions once the borrower filed for Chapter 13. They would be forced to accept a stream of payments through the bankruptcy process on ordinary mortgage terms (i.e. a 30-year term at a reasonable, fixed rate of interest) in the area where the property is located based upon a fair-market valuation of the real estate involved. So if the lender had a 10-year term mortgage loan of $300,000 with the borrower at a variable rate currently at 15.99% interest on real estate worth $200,000, the lender might be required in a Chapter 13 plan to accept a stream of payments based upon terms of principle balance of $200,000 and a market-rate of interest of perhaps 8.00% fixed, for a period of 30 years.

Obviously, this is no "free ride" for the borrower, because he or she is still forced to pay a mortgage if he or she wants to keep their home. And the lender's deficiency claim of $100,000? It's paid the same percentage amount that all other unsecured creditors would receive. After all, there is no value to the collateral for that portion of the mortgage claim anyway, so who is the lender really fooling? Himself, really. The real objection that the mortgage lenders have to this provision is that it forces them to recognize that they have suffered a loss immediately, rather than grudgingly having to come to this same realization by dragging out the process through a foreclosure proceeding. One way or another, the foreclosing mortgage lender will suffer a loss, the only question is when.

But let's think about the logical ramifications to lenders if residential mortgage loans could be modified in the future based upon prevailing market rates and prevailing land values. Logically, it would mean that to get a mortgage loan, the lender might actually require a down-payment by the borrower so there would be some kind of equity cushion for the borrower to want to protect (what a novel idea in this day and age!). It would mean that lender would be deterred from granting "high-margin" adjustable rate mortgages with high interest rates for fear that they would be reduced in the future to prevailing rates. It would mean that perhaps fewer un-creditworthy borrowers would be able to get a mortgage without first providing a larger down-payment. It would mean that mortgage lenders would have to be more concerned than they are now about a borrower's ability to repay a loan. It would mean that existing mortgage lenders would be placed in the position of having to finally deal constructively with borrowers in negotiating loan modifications (lest the borrower file a Chapter 13 bankruptcy case) when the borrower suffers a job loss due to a downturn in the economy, an unforeseen illness or another kind of everyday disasters with which consumers may be confronted from time to time.

So, rather than being the source of higher interest rates, the specter of a possible bankruptcy filing (with the attendant possibility of mortgage modification in a Chapter 13 plan), might actually help keep mortgage rates in line and return some sanity to an otherwise insane mortgage practices. And, best of all, the change in the Bankruptcy Code would not require any taxpayer outlay or "bailout" at all. Its high time Congress stopped listening to mortgage companies' outlandish (and unsubstantiated) tales of gloom and do something that will really help stem the rising tide of foreclosures. The addition of such a bankruptcy provision would do so immediately.

Posted by: Richard N. Gottlieb, Esq. | April 3, 2008 4:06 PM | Report abuse

Richard j Pollak 4541 C.R.138A Alvin Texas 77511

Judgment Award Appeal waited for ENRON Judge then day in Court denied, then Fifth Circuit also denied, now Foreclosure notice, DEED Stipulation Paragraph Edit on Judgment was Substance of Appeal, Day Rate damages was Substance of Lawsuit, $1,000.00 Award was Appeal, Attorney received expense Judgment!

Sued Washington Mutual Core Adversary under Seal Judge changed defendant to Homeside Lending allowing Washington Mutual Attorney to call Homeside Lending to Testify, reversed for Judgement Award Payment, but Board Certified Attorney Certified Mail RESPA request {ignored by Washington Mutual} became inadmissible. My lay person RESPA request was being ignored, BBB forwarded and was also ignored, RESPA request received the only damage Judgment, {thanks to the BBB support} substance matters related in RESPA request that Judge took under advisement pertaining, was absent from Judgment and ignored to date.

Loan Manager Testified Coveted Prepayment are Common Practice Defendable, despite Bank One standard DEED Cover Page, Bold Print Stating Prepayment requires Signed Authorization, highlighting occurrence damage. Paragraph was edited by cropping on Judgement reversing intended meaning, bottom half of Paragraph was Quoted on Judgment.
Loan Manager Testified Coveted Escrow reductions are Common Practice Defendable, despite altering every Documents History relative, Evidenced.

Loan refinance was blocked, Bankruptcy was forced and reversible by Loan History production. Homeside Lending stated Bank One N.A. Loan Originators action was a "Principal Curtailment" Loan Originator transferred Loan, Lenders attempt at Curtailment reversal became Escrow reduction {I call it Escrow Curtailment} Lender Coveting Actions required false IRS 1098 Form, false Credit Reporting, Attorney RESPA request being ignored and My RESPA request being Ignored, BBB Arbitrator Chair with Membership was removed from Washington Mutual for Three Years, understand Loan History was supplied on release of Stay Day Pretrial, itemizing Curtailments, calling for Court Action, expecting not to experience Supporting Attorney failure to appear for hearing, sending unknown surrogate.

Respectfully prompt and current on all first twelve payments. Bank One N.A. Loan Originator transferred Loan after Nine months by action of reversing final payment to credit Loan Principal only {defined by Homeside Lending Loan Manager as "Principal Curtailment"} Comptroller of the Currency governs N.A. prohibiting' prior to Transfer, then Office of Thrift Supervision blindly governs.

Real time Loan Statements Payment Histories evidenced, including B.B.B. Support, that Loan Curtailments were for Five Year Coveted, Constitutes action was not Prepayment but multiple "Curtailments." Receiving Loan in transfer F.A Lender in attempt to reverse "Principal Curtailment" in admitted accounting error reducing Escrow, creating additional shortages "Escrow Curtailment" increasing demand of nearly $120.00 for 12 Months.

Loan History first produced on the same Day Bankruptcy Stay was removed by Washington Mutual, it was being Coveted by Homeside Lending Loan Manager {Testified Curtailments are Common Practice} Wa.Mu. acquired Homeside Lending and Loan Manager then Loan History following release of Stay.
Testimony by F.A Loan manager reported Common Practice for N.A. Lender to Breach DEED Term commitment stating Principal Curtailment to be Common Practice and Escrow Curtailment was Common Practice.

Concealed Loan payment Misapplications through Transition was defined by Learned Board Certified, as Theft. Jeopardizing robbery prosecution if My Home becomes foreclosed becomes Action becomes Federal Judge Rule, Ruling that Common Practice is Defendable Breach of Contract by Corporation. Judgement creates exploitable Case Law danger, because Washington Mutual Called Loan, review is in all best interest, despite all preferring closure without day rate damages arbitration.

My Judge famed for largest Historic Bankruptcy Schlumberger oilfield Russia claimed 10 day appeal time-frame expired despite Clerk delay Posting for Postal Delivery and Second Judge {Award Appeal} famed for ENRON, refused Excusable Neglect Appeal, Borrowed April 2001 at 6.5% for 15 Years, no second, from Bank One N.A. {Comptroller of the Currency} regulated.

For Five Years regulator "C.C." forwards all My inquiries to "O.T.S." that fails to govern or reply "O.T.S." never responds, A.G. never responds, D.O.J. never respond. Regulation by the C.C. instead of O.T.S will force Lender accountability eliminating stuck between, but Lender C.E.Os are destroying homesteads, helped by Stock Market & Future Trading. C.C. regulation transferred with Loan to O.T.S. Regulation failures, altered DEED Contractually.

Bankruptcy arrears paid-off in full Years ago, if Foreclosed, Presidents equates Judge allowed
$1,500.00 "Curtailment" to transition into theft by "Common Practice" defense, liken-to Bank robber
claiming "Common Practice" Defense and will be offered for Case Law exploitation!

100 days following Trial Judge Signed awarding {$1,000.00} RESPA Damages 4 of 10 day allowed appeal time-frame was spent before U.S. Mail delivered. {Bankruptcy RULE "RULE 2005"} extends in President 5 days all Judgment appeals, Appellate Attorney argued Excusable Neglect for spending 12 day's from Signed day to Appeal's filing day.

Washington Mutual recently returned $7,500.00 Core Bankruptcy Arrears skirting damages and overriding Judgment by default admittance, without rendering the Lawsuit's substance of arbitrated day rate damage, allowing Precedent that Theft ignored if defended as Common Practice!

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