Mortgage Bankruptcy Bill Could Be Revived
August 11, 2009 11:08 AM
We applaud Senate Majority Whip Dick Durbin's decision to consider resurrecting the bankruptcy bill if the financial services industry is not able to complete 500,000 mortgage modifications by November. Foreclosed homes are nonperforming assets whose liquidated values are 8-10% less than their current market values after selling costs. If the homes aren't kept up or are vandalized their values will be even less than current market values. Once the real estate market stabilizes we will be lucky to return to historical 2-4% annual appreciation rates. Subtract carrying costs (taxes and insurance) and the measly net return makes holding foreclosed homes a poor long term investment for financial service firms' stockholders.
It is therefore very much in the interest of the industry and its stockholders to complete those modifications whenever it makes economic sense, and taxpayers are even underwriting the administrative costs of modifying those loans. It makes economic sense any time financial services company can restructure the mortgage for at least the homes current market value and the borrowers new payments will be 31% or less of their current income. The financial services firm would save the selling costs and future holding costs (taxes and insurance). With the likely measly net rate return if they held the asset, it would take many years of appreciation before they could liquidate the home for more than that.
There are many homeowners who can't afford their current mortgage payments, but could afford to make the payments on a reduced mortgage principle equal to or greater than their home's current market value. Creditors should be voluntarily and aggressively reducing those mortgage balances to such levels because it is in their stockholders' interest, but most are not. Bankruptcy judges are also charged with protecting the interest of creditors. If the bankruptcy bill passes they would have the ability to restructure the mortgage when it is the interest of the lenders, and the responsibility to order a foreclosure when a homeowner is unable to make payments sufficient to provide lenders a reasonable return on the current value of the home. This is not a cramdown for mortgage lenders, it is a helping hand.
Mandated arbitration between borrowers and servicers prior to foreclosure is also a good idea provided steps are taken to assure arbitrators are totally independent of industry influence. Allowing homeowners to stay in their homes for some time while they pay fair-market rent and creating financial penalties for firms that fail to meet the administration's foreclosure-reduction standards are also good options.
It is therefore very much in the interest of the industry and its stockholders to complete those modifications whenever it makes economic sense, and taxpayers are even underwriting the administrative costs of modifying those loans. It makes economic sense any time financial services company can restructure the mortgage for at least the homes current market value and the borrowers new payments will be 31% or less of their current income. The financial services firm would save the selling costs and future holding costs (taxes and insurance). With the likely measly net rate return if they held the asset, it would take many years of appreciation before they could liquidate the home for more than that.
There are many homeowners who can't afford their current mortgage payments, but could afford to make the payments on a reduced mortgage principle equal to or greater than their home's current market value. Creditors should be voluntarily and aggressively reducing those mortgage balances to such levels because it is in their stockholders' interest, but most are not. Bankruptcy judges are also charged with protecting the interest of creditors. If the bankruptcy bill passes they would have the ability to restructure the mortgage when it is the interest of the lenders, and the responsibility to order a foreclosure when a homeowner is unable to make payments sufficient to provide lenders a reasonable return on the current value of the home. This is not a cramdown for mortgage lenders, it is a helping hand.
Mandated arbitration between borrowers and servicers prior to foreclosure is also a good idea provided steps are taken to assure arbitrators are totally independent of industry influence. Allowing homeowners to stay in their homes for some time while they pay fair-market rent and creating financial penalties for firms that fail to meet the administration's foreclosure-reduction standards are also good options.
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