By Lori Turoff ([email protected])
Is A Cram Down Coming Our Way?
More than 9% of all mortgages nationally are either delinquent or in default according to the Mortgage Bankers Association. Over 2.3 million loans went into foreclosure last year, more than twice the volume of 2006. Estimates are for 3 million foreclosures in 2009 unless something drastic is done by the government to change things.
The NY Times reports Obama’s $50 billion plan for help to homeowners to be announced tomorrow may include government subsidies to reduce a borrower’s interest rate, which the lender would have to match with its own money. Banks might refuse to cooperate, though, if they still see these borrowers as bad risks. Under current law, a borrower cannot use bankruptcy to restructure a mortgage but must seek foreclosure. If legistlation is enacted to change the power of bankruptcy courts, allowing what is sometimes called a “cram down”, it would increase the borrower’s ability to negotiate new loan terms with the lender. Some fear that investors will stop funding mortgages if the terms can later unilaterally be changed in bankruptcy. There are also fears that bond holders will sue the issuers of bundled mortgages if the value of mortgage backed securities are affected. Yet few would disagree that home foreclosures are a root cause of the economic meltdown.
J.P. Morgan and Citi have implemented a temporary freeze on new foreclosure filings, according to the Wall St. Journal. Freddy and Fannie will restructure only when borrowers are already 90 days late with payments. Something has to be done, it is agreed but what is the right course of action for the government to take to prevent the snowball of failing mortgages from continuing to grow?
There’s A Moral Hazard Here, Too
Even if we were to agree that mortgage defaults are a huge problem and that something has to be done about it there is another issue at stake here.
“This is the equivalent of having the government write a check to both the borrowers and the banks, who both made bad decisions,” he said. “But if you are going to do something, regardless of the mechanism, you are going to have to cross the Rubicon to direct federal assistance. It’s a sign of how very few options are left.”
Many feel that the government is using taxpayers’ billions to bail out borrowers who make bad decisions. While some borrowers were deceived and even defrauded, others knowingly borrowed more than they could afford. The family home became a convenient ATM. A bailout helps the banks who make bad loans, and the borrowers who made bad decisions but does nothing to help the frugal and responsible borrowers and homeowners who are current in their payments. In the midst of an economic recession of unknown and increasing severity why should the frugal, responsible borrowers get nothing? Does it pay to act foolishly? Should we all stop making our mortgage payments if we can get a lower rate? Of course, the argument can be made that by bailing out the reckless banks and borrowers the tide of failures is stemmed even greater catastrophe prevented, ultimately benefiting everyone in the long run. What do you think of this?