House Committee Passes Bankruptcy Reform

The House Judiciary Committee has passed H.R. 3609, the Emergency Home Ownership and Mortgage Equity Protection Act of 2007. The committee passed the bill, which was introduced by Rep. Bradley Miller (D-NC), by a vote of 17-15.

This is a measure which, oh my gosh, would restore the authority of courts to modify home mortgages in a Chapter 13 bankruptcy — an authority they had before 2005 when the law was changed.

It has been argued that bankruptcy courts should not have the right to change residential mortgages, that such an option is unfair to lenders and violates the general concept of “contract sanctity.” And yet, curiously, bankruptcy courts have the right to amend other agreements, say the financing on a vacation home or a yacht and the country has survived.

The news release below from the Mortgage Bankers Association explains why lenders lost in the committee. Yes, mathematically, it is true in the example that if you increase the interest rate for a $300,000 over 30 years then, by gum, the loan will generate $144,000 more over its life.

And that’s good news for whom?

What’s not said is this: When was the last time you met anyone, anyone at all, who had a mortgage for 30 years? Apparently no one on the House committee had heard of such folks either. Where is the evidence that rates will rise? Did they go down suddenly when the law was changed in 2005? Are there not many, many factors which influence interest rates? How can you separate out just one?

The measure must now pass the full House, the Senate and then it must be considered by the President. If the measure does not pass this year, it will pass next year with a new Congress, a new President and another 2 million foreclosures reducing home values nationwide.

The full MBA release is below:

MBA’s Kittle Reiterates Opposition to Bankruptcy “Cramdown” Bill

Washington, DC (December 12, 2007) - David G. Kittle, CMB, Chairman-elect of the Mortgage Bankers Association (MBA) today reiterated MBA’s strong opposition to legislation that would increase the cost of mortgages for all borrowers by allowing judges under Chapter 13 bankruptcy proceedings to unilaterally mark down the value of a primary mortgage from its full amount down to the fair market value of the home. Mr. Kittle’s comments came as the House Judiciary Committee was marking up H.R. 3609, the Emergency Home Ownership and Mortgage Equity Protection Act of 2007. The committee passed the bill by a vote of 17-15.

Mr. Kittle issued the following statement:

“We are very disappointed that the committee has approved this partisan legislation. We appreciate the committee members’ intent - to do something to help troubled borrowers. But this is not the answer. Giving judges the power to completely rewrite a loan contract between a lender and a borrower brings into question the value of the collateral the loan is made against, which is the cornerstone of our mortgage finance system.

The end result will be a major repricing of risk by lenders. I believe that, if this bill were to pass, it would result in an increase of 1 and ½ to 2 points in the rate that most Americans would pay on their mortgages. If you take a 6% rate and make it 8%, someone with a $300,000 mortgage will have to pay an extra $400 a month, or $4800 a year, which comes out to over $144,000 over the life of a 30 year loan. That is what this bill will do if it becomes law.

There are a number ways that lenders are already acting to help borrowers who are falling behind on their bills, including the framework for expedited loan modifications announced last week by the American Securitization Forum and endorsed by MBA and the HOPE NOW alliance. And we will continue doing more, because nobody wins when a home goes into foreclosure. But to radically alter the bedrock on which our mortgage system is built is a counterproductive overreaction to the current situation.”

This entry was posted on Wednesday, December 12th, 2007 at 7:02 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.