Many Americans are struggling to keep up with their mortgage payments but unforntunately many are months behind and at risk of losing their homes. It looks like the Obama Administration will take aggressive (if not socialist) action to prevent foreclosures and have loans "modified".
Modifying a loan actually means changing the terms of the original contract. This includes lowering the principle amount, the interest rate and increasing the number of years the loan will be paid back.
Sounds like a great idea you say? Why not do everything possible to keep fine folks who bought houses they could not afford in their home?
I'll tell you why this is bad policy. Firstly, it creates a moral hazard in that people are rewarded for taking on risk they never should have incured in the first place.
Secondly, it now will encourage those who are current on their mortgages to stop paying so they can qualify for the new and better terms. Lastly, and just as important, what about the sanctity of contract law? When two entities enter into a contract will the government be able to step in and force one party to change the terms?
If you or someone you know is struggling with mortgage payments just stop paying and wait for your bailout, I'm serious it makes no sense to make payments when you will not be foreclosed and you will get a modification of your loan. Meanwhile, you may live in your home for free for months until the loan is modified.
Lawmakers and Citigroup reach deal on mortgages
Democrats hope agreement will lead to passage of bill to avoid foreclosures
By Ronald D. Orol, MarketWatch
WASHINGTON (MarketWatch) -- Senate Democrats have reached an agreement with Citigroup Inc. on a key bill to give bankruptcy judges the authority to eliminate some mortgage debt and help reduce foreclosures, lawmakers announced Thursday afternoon.
According to Sen. Richard Durbin, Citigroup has agreed not to oppose legislation that would allow bankruptcy judges the authority to modify mortgages that were set up prior to the enactment of the bill.
Fannie and Freddie said they will extend the suspensions until Jan. 31. In November, Fannie and Freddie said they would not foreclose on occupied homes or evict homeowners from Nov. 26 to Jan. 9 to implement a streamlined mortgage modification program.
Read Article Here:
http://www.marketwatch.com/news/story/Lawmakers-Citigroup-reach-deal-mortgages/story.aspx?guid=%7B115971DA%2DDA67%2D4B2D%2DB926%2DC393D1DE0C3A%7D
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Lou ..... while I agree that this sounds bad it might not be.
ReplyDeleteAs I am sure you know, secured debts can be restructured or modified in a Chapter 13 bankruptcy, and secured creditors, except the mortgage lender on a principal residence, can be subject to what you are writing about, and is called a "cram down."
This happens when the amount of the debt is greater than the value of the collateral securing it; the court reduces the value of the secured debt to the market value of the collateral, with the remainder being treated as unsecured (and subject to the same repayment plan/discharge terms as any other unsecured debt).
The prohibition of court-ordered modifications for mortgages on principal residences was created in 1978.
Before 1978 bankruptcy judges could do what the new law proposes. I guess our country was "socialist" back then too.
Maybe the real question is why this all changed in 1978? And why were chapter 7 bankruptcies recently done away with? Bank greed.
Before 1978 everyone had 30 year fixed mortgages which they got by putting down a good chunk of money. But the bankers still lost out when people went bankrupt. So they got the politicians to "protect" their loans in bankruptcy proceedings.
Once that happened they started to introduce more and more risky loans until it recently all imploded.
Maybe a bit of blame on the banks and less on the working people is in order.
Enjoy your blog!