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Loan plan
gets nod
STAFF AND WIRE REPORTS
Published: Friday, January 9, 2009 at 1:00 a.m.
Last Modified: Thursday, January 8, 2009 at 11:17 p.m.
Democratic lawmakers have reached a deal with Citigroup Inc. on a
plan to let bankruptcy judges alter home loans in an effort to prevent
foreclosures and urged other lenders to follow suit.
The lawmakers aim to attach the plan to President-elect Barack
Obama’s economic stimulus legislation, and said Thursday the change in
bankruptcy law — allowing what are called “cramdowns” — could ease the
foreclosure crisis that has dragged the economy into the worst recession in
decades.
The deal is likely the first of
several measures being crafted this year that propose to trim the principal
owed by homeowners saddled with mortgages larger than the current value of
their house.
It marks a surprising change of
direction by the financial-services industry. Banks have consistently fought
such legislation, saying cramdowns would raise borrowing costs for all home
buyers and jam courts with homeowners who would not otherwise declare
bankruptcy.
Several Southwest Florida experts
echoed those concerns, warning that the measure would boost mortgage rates
because lenders would have to charge a risk premium and that it would
further erode bank capital.
But some also acknowledged that it
might do much to stem foreclosures. One in 10 homeowners — about 4.6 million
people — are either delinquent in their mortgage payments or in the process
of foreclosure.
“In the greater sense, anything we
can do to reduce the rate of foreclosure activity would be extremely helpful
in stabilizing the real estate industry and housing prices and will help us
get us through the recession as quickly as possible,” said Budge Huskey,
Southeast region executive vice president for Coldwell Banker’s parent NRT
LLC, who works out of Sarasota. “At the same time, it would never be my
first choice to do this because it is fraught with legal complications and
will be challenged by lenders.”
The reason cramdowns are being
considered is that lenders have not been willing to renegotiate loans
voluntarily, Huskey said.
Tramm Hudson, a Sarasota-based
banking consultant, worries about the impact on lenders, already struggling
in real estate-induced recession.
“They would have to charge off a
portion of that loan to meet what the judge orders,” Hudson said. “It would
be, frankly, giving the judiciary control over banks’ capital.” Lending
rates could rise because banks would charge more for loans that could later
be altered by judges, he said.
Banking regulators would have to agree to stop criticizing banks for
working out new terms with borrowers, which some banks have been doing to
assist customers during the recession. “You’ve already got the regulators
with their big sticks beating the banks for being lenient with their
borrowers,” Hudson said.
The proposal would be a short-term
gain but a bad long-term precedent, said Geoff Allison, president of
Sarasota’s Gulf Atlantic Mortgage.
“How can a mortgage company in the
future put together a mortgage term that they have to worry about a judge
coming in later on and changing it,” Allison said. “Lenders are going to
price in that risk that the contract might be changed, which will cost
borrowers more.
“But these are extraordinary times,
and if the lending institutions are going to agree to that, then so be it,”
he said.
Others wondered whether the measure
would encourage people to head for the courts.
“Why do we want to force a consumer
into bankruptcy?” asked April Charney, a Jacksonville legal aid attorney who
has coached hundreds of attorneys on how to help their loan-strapped clients
renegotiate a mortgage.
While she is in favor of giving
federal bankruptcy judges the power to modify first mortgages, Charney said
she would be against legislation that essentially pushes loan-strapped
consumers in that direction.
“Why can’t we have a FEMA, an
administrative process, or give the power to state courts?” Charney said.
The number of people filing for
Chapter 13 bankruptcy — in which debtors can pay back their debt over three
to five years — rose to 263,756 in the nine months of 2008, according to the
American Bankruptcy Institute. About two-thirds of those debtors have a
mortgage and half are not able to keep paying the mortgage as part of their
reorganization and could benefit from the cramdown proposal, experts said.
Chapter 7 filings, in which
companies and individuals attempt to completely liquidate their debts,
doubled to 10,607 during the first 10 months of 2008, statistics from the
U.S. Bankruptcy Court for the Middle District of Florida show.
Judges can now reduce auto and
student loans, and mortgages on second homes for people in bankruptcy, but
they cannot touch the terms of a primary mortgage. The new proposal allows
judges to force major reductions in home loans, after homeowners certify
that they have attempted to contact their lenders about a mortgage reduction
before bankruptcy proceedings begin. They do not have to have engaged in
negotiations with their banks.
The bill would apply to all
mortgage loans, including but not limited to subprime loans, written any
time prior to the bill’s date of enactment. It allows judges the ability to
lower principal or interest rate, extend the term of the loan, or any
combination of the three.
In a concession to lenders, if a
lender is found to have violated the Truth in Lending Act during bankruptcy
proceedings, the institution would be subject to fines, but would not have
to forgive the loan, as is now the case.
Staff writers Tom Bayles, Michael Braga, John
Hielscher and Michael Pollick contributed to this report, which also
contains information from Herald-Tribune wire services.
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