Best mortgage debt solutions being resisted

Lenders are forcing foreclosures rather than making principle reductions:

Congressman Barney Frank, Chair of the House Financial Services Committee has argued quite persuasively that the only way we are going to end the problem of unaffordable mortgages is to “cram down” the principle.  He wrote to four big banks, arguing that “to save homes on a large scale we must move past temporary modifications in interest rates or terms and focus on permanent principle reductions that result in truly sustainable mortgages.”

The Obama administration’s most recent patch to their unsatisfactory “making homes affordable” program recognized the wisdom of this and added inducements for lenders to reduce principle when interest rate reductions won’t work.

I have long argued that it is usually better for the homeowner, the neighborhood and the banks to cut principle than it is to foreclose.  When everything is totaled, it almost always costs a lender far more to foreclose than it does to cram down the principle.

You would think that with all this logic and support, cram downs would be common.  But, no, the banks are pushing back.  They do not want to reduce principle now because under current accounting rules, foreclosures postpone the loss, and the longer they postpone their loss the better their current bottom line looks.

The only way out of this is, as I have argued before, to let bankruptcy courts do the cram down.  Right now they can reduce the principle on your vacation home, your investment property — even your yacht — but not on your home.  Just knowing that the court can do this would make the banks more amenable to principle reductions.

No one files bankruptcy lightly.  And bankruptcy courts are very careful with all debt forgiveness.  They do not make plans that hurt the lender more than necessary and they do not approve plans that cannot work.  I talked to a bankruptcy lawyer about this and he said that he is always very careful to submit a plan for approval that can work, and is fair to the creditors, because if he does not do that then the court will throw it out, and start going over all his plans with a fine tooth comb.

A bill to allow bankruptcy judges to do these cram downs was defeated in Congress after heavy lobbying by the banks.  Now they are fighting even voluntary principle reductions.

Comments are closed.