Senate Lapdogs KowTow to Their Banking Masters
On April 29, 2009, the US Senate, by a vote of 51 to 45, blocked passage of bill that would have allowed bankruptcy judges to modify mortgages in two important ways.
First, Judges could lower and fix interest rates. Many borrowers with subprime loans started out with low “teaser” rates for two or three years that then increased (usually not more than two percent a year) until they reached a maximum rate determined by the borrower’s creditworthiness at the time the loan was made. I have had several clients whose interest rates have now reached 12% or more. Because they have less then sterling credit and/or their house is now worth less than the mortgage balance, they are not able to refinance at a lower rate. The legislation would have allowed bankruptcy judges to lower the rate to a published rate and fix the rate for a term up to 40 years.
Second, the leigislation would have allowed bankruptcy judges to “cramdown” mortgages to the value of the property securing the debt. In many parts of the country, property values have fallen significantly, so the property owners are “upside down” on the mortgages. In that situation, the borrower typically cannot refinance (Why would a new lender want to make a loan it knows is undersecured on the day the loan is made?), cannot sell (Unless the lender is willing to do a “short sale” – accepting less than the full loan balance to allow a sale to go through ([some lenders are allowing short sales, but many are not]), and really has no incentive to keep making payments on a property that is worth less, and in many instances, far less than the the mortgage. From a strictly business standpoint, it makes more sense for the borrower to walk away and let the house be foreclosed.
The banking and mortgage industries fought the legislation through their usual scare tactics, claiming that the legislation would make it harder to get a loan, would make interest rates go up, and buyers would have to have larger down payments, all because lenders would not be assured that the loans would be paid in full. Apparently all of these morons haven’t heard about all of the foreclosures happening around the country. After foreclosure, the lender does (not might, DOES) incur costs for holding and disposing of the property. (Changing locks, removing any property left behind, maintaining the property [cutting the grass, if nothing else], insuring the property, paying property taxes, etc, etc, etc.) When the lender ultimately sells the property, they get to pay closing costs, usually including a six percent realtors commission. Lenders also tend to discount property prices so they can sell the property more quickly. (Which has the eeefct of driving down property values for the rest of the neighborhood.) Lenders lose MORE through a foreclosure than they would by allowing the loan to be modified. If a bankruptcy court modifies the mortage, the borrower stays in the house and resumes payments (typically within 30 to 75 days), and the lender incurs only minimal attorneys fees for participating in the Chapter 13 and none of the costs or headaches of holding and disposing of the property.
Allowing bankruptcy courts to modify mortgages is actually in the best interests of the lenders, too, although they are apparently too stupid (or dishonest) to admit that fact. You should remember that these are the same people who promised us that interest rates on consumer debt (credit cards and installment loans) would go down if Congress passed the 2005 amendments to the Bankruptcy Code. If the interest rates on your consumer debt went down in 2006, you would be the first person to tell me that.
Senate Republicans with the help of a few conservative Democrats have sent a clear statement that if you are not represented by a very highly paid lobbyist, do not expect your elected “representatives” to represent your interests. Wall Street gets billions, Main Street gets nothing. As a Texan, I would like to thank Senators Hutchison and Cornyn in particular for their parts in this farce.
Michael Baumer
Law Office of Michael Baumer