Bad News for Lenders in Bankruptcy Legislation

Published: February 9, 2009. Washington Report: Bankruptcy Legislation, by Kenneth R. Harney in Realty Times reports on proposed legislation that will impact mortgage lenders across the country.

It's a controversial subject but one on the "fast track" to passage. It's mortgage "cram downs."

Cramdown means a court can tell a lender: Your borrower may owe you $200,000 on the house, but the property is only worth $100,000 in today's real estate market, so that's all you're owed from here on in.

To qualify for relief, the homeowner "will need to file for Chapter 13 bankruptcy, agree to a court-supervised household expenditures plan for up to five years, and make at least partial repayments on debts to their creditors. "

Though the final version of the legislation still must be negotiated between House and Senate, it's likely it will come with three key features:

First, only mortgages closed prior to the date of enactment will be covered.

Second, all delinquent borrowers will need to contact their lenders and inform them of their intention to file for bankruptcy. That will allow lenders to put together their best offer -- including a reduction of the amount owed and the interest rate -- before the borrower actually files.

And finally, if there is an increase in the value of the house during the five year bankruptcy period, the lender will be owed some portion of it.

Read the full report here.

Vested Title Inc.

648 Newark Avenue, P.O. Box 6453, Jersey City, NJ 07306
Tel 201-656-9220. Fax 201-656-4506
E-mail vti@vested.com - www.vested.com

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Mortgage Modifications a Bust?

We have previously written about the failure of mortgage modification programs in the current economic crisis. See our post of December 10, 2008, Foreclosure Follies: A rebuttal to the FDIC modification plan. In our post we pointed out that the FDIC's prediction of a 15% or so failure rate when loans are modified was too low. Now, the Comptroller of the Currency is weighing in with a 50% figure. See, Second time no charm for homeowners appearing through the Washington Post wire service.

To answer the question why so many modified loans are failing is not easy. Could it be

• Loss of job?
• The type of modification, e.g. is the rate lowered or is the arrearage merely spread out?
• A feeling of helplessness when the home is worth less than the mortgage?

Some are concerned that a focus on re-default rates could discourage loan modifications. "That data just makes me wonder what kind of modifications those national banks and thrifts are doing. Were they sustainable?" said Mark Pearce, North Carolina's deputy commissioner of banks and a member of the State
Foreclosure Prevention Working Group.

Vested Title Inc.
648 Newark Avenue, P.O. Box 6453, Jersey City, NJ 07306
Tel 201-656-9220. Fax 201-656-4506
E-mail vti@vested.com - www.vested.com

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Mortgage Modification May Not be a Cure-all

Realty Times carries an article by Broderick Perkins – "Is A Mortgage Modification For You?"

"Home loan modifications are designed to save homeownership, but they've also created a new mortgage maze pitted with "buyer bewares."

While the demand for modifications is increasing due to federal, state and local foreclosure and bailout efforts, Perkins writes, "Caught in the lurch, homeowners are finding it tough to know when a modification will work and how to best obtain one."

What is a mortgage modification?

A home loan modification, granted only upon the existing lender's approval, permanently reworks some of the terms of an existing mortgage in order to make the loan more affordable to the homeowner.

The strategy is typically designed for homeowners struggling to pay their mortgage, not for those who can pay their mortgage or are eligible for a refinanced loan

Will a modification work for a borrower? Maybe not if:

• The modified loan comes with payments you still can't afford.
• Your current interest rate is already low and there's no room for the lender to lower it further.
• You can make the new payments, but the mortgage balance is greater than the value of your home and you don't plan on staying put long enough to reverse the loan-to-value imbalance.
• You have not already missed payments on your mortgage or can't show financial hardship due, say, to job loss, pay decrease, illness or interest rate increase.
• You have other properties, investments or assets that could be liquidated to cover your mortgage debt.
• A short sale (The lender forgives a portion of the debt owed if you can find a buyer), bankruptcy, auction sale, refinance or other approach, short of a foreclosure, is a better option.

Read more here.

Vested Title Inc.

648 Newark Avenue, P.O. Box 6453, Jersey City, NJ 07306
Tel 201-656-9220. Fax 201-656-4506
E-mail vti@vested.com - www.vested.com

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Wall Street Journal - The 'Guarantee' Morgue

The 'Guarantee' Morgue - Good for bankers and politicians; bad for taxpayers.

The Wall Street Journal weighs in on the "fanfare" surrounding President Obama's limits on bankers' compensation. But, they say, "the real drama is taking place behind-the-scenes as the biggest banks lobby to have the federal government guarantee their toxic assets, and the political class seems ready to oblige."

The compensation caps are no doubt politically satisfying as revenge for Wall Street's role in creating the current financial mess. Heaven knows it's hard to sympathize with Goldman Sachs, which yesterday expressed its desire to leave the Troubled Asset Relief Program on the very day the new bonus limits were announced. We assume this means that from here to eternity Goldman will not be too big to fail.

Taxpayers need to realize, however, that Members of Congress want to impose salary and bonus limits to give themselves political cover when they are next asked to provide more bailout cash. Congress wants to seem to be tough on bankers in return for the cash, even if in reality the feds aren't tough at all.

What's next? Guarantees of one sort or another. "The Obama Administration is debating several new bailout options, and the favorite of bankers is federal guarantees. The idea is that the government would agree to absorb any potential losses on dodgy paper, perhaps after some small initial loss by the bank."

Chuck Schumer, the Senator from Wall Street, told Bloomberg this week that insuring bad bank paper "is one possibility that seems to be gaining some currency." And no wonder: For bankers and politicians, the benefits are clear. The bankers know their losses have been limited, which means their bad lending choices become largely the taxpayer's problem. Unlike a public capital injection, a guarantee also doesn't by definition dilute current shareholders. When the Federal Reserve guaranteed $29 billion in Bear Stearns paper for J.P. Morgan Chase last year, it came with no strings attached.

While guarantees are on the table, they are not a panacea. Read more here.

Vested Title Inc.
648 Newark Avenue, P.O. Box 6453, Jersey City, NJ 07306
Tel 201-656-9220. Fax 201-656-4506
E-mail vti@vested.com - www.vested.com

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Drop in Rental Market Offers Hope to Tenants

Business Week reports "Rents Drop Nationwide as Vacancies Spike. Good news for renters as landlords are forced to offer discounts to keep their properties occupied."

• The economic crisis has opened up opportunities for apartment tenants because inventory of vacant apartments is expanding.
  
  

  "Of course, your ability to hold on to an apartment—especially a luxury unit—depends on how secure you feel about your own job. Americans lost about 2.6 million jobs in 2008 (mostly in the final quarter of the year) and are likely to lose millions more this year. They are losing money on stocks and other
  investments and are cutting back on costs by downsizing and moving in with family members or roommates as they hunker down for a deep recession."

Advice? If you have a job, sign the longest lease possible.

Read more here.

Vested Title Inc., 648 Newark Avenue, P.O. Box 6453, Jersey City, NJ 07306
Tel 201-656-9220. Fax 201-656-4506
E-mail vti@vested.com - www.vested.com

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