Cram Down Loan Modification

Senate Democrats are attempting to push through a controversial plan to allow bankruptcy judges to modify the terms of troubled borrowers’ mortgages as part of a larger package of foreclosure prevention programs. Allowing judges to “cram down” loan modifications over the objections of lenders could raise interest rates on mortgage loans by 1.5 percent or more, industry groups fighting the proposed changes to the bankruptcy code say. If the bill caused interest rates to go up by 1.5 percent, payments on a $300,000 30-year fixed-rate loan would increase by $300 a month. The bill would also mean higher down payments for home purchases and increased equity requirements for refinancing existing home loans.

The above is certainly likely to make the real estate investing climate slightly worse off than conditions are now (low mortgage rates, depressed housing prices). On the flip side, there are some positive points that the new bill (S2636) is going to bring to the table, which hopefully can curb the foreclosure frenzy.

Some of these positive points include: $200 million for pre-foreclosure counseling, and giving the authority to the state housing finance authorities to issue $10 billion in additional mortgage revenue bonds to refinance subprime loans and provide mortgages for first-time home buyers.

Opponents of the plan say allowing bankruptcy judges to change the terms of mortgages after the fact will raise the cost of borrowing, in part because investors who purchase securities backed by mortgages will have less confidence in their ability to collect payments or foreclose on properties.

More on “Project Lifeline”

Well, project Lifeline was formally announced today by Treasury Department and the Department of Housing and Urban Development. As mentioned before, it halts for 30 days foreclosure proceedings for homeowners in default for over 90 days. The idea is to give homeowners and lenders some additional time to work out better loan terms.

It looks like so far it’s a pilot involving 6 of the largest players in the mortgage industry: Bank of America, Citigroup, Countrywide, JP Morgan, Washington Mutual and Wells Fargo. The hope here is that the rest of the lenders will follow suit. These 6 lenders have already been involved in the Hope Now alliance, an effort organized by the Bush administration, to keep subprime ARMs from resetting. The Hope Now alliance states that it helped 7.7% of 7.1 million subprime borrowers (or 545,000 borrowers) during the back half of 2007. This was done through permanent loan modifications (such as lower interest rates) and negotiation of repayment plans.

Unlike Hope Now, Project Lifeline addresses all mortgages, not only subprime. Project Lifeline does not apply to vacant properties, investment properties, or homeowners in bankruptcy proceedings or facing a foreclosure date within 30 days.

So the whole thing makes me wonder: If this actually a viable solution or is this a “photo op” for our politicians? After all, perception is everything, especially in this election season. And we are, after all, headed towards a recession… So it’s important to at least look like we are doing something.

Project Lifeline just may be a logistical nightmare for the lenders. How will they handle all these homeowners calling them over the next 30 days? And how will anything actually get resolved in 30 days? Borrowers and investors negotiating on their behalf have already been having a difficult time getting lenders to respond; short sales take “forever and a day” to negotiate. There are just too many foreclosures. And there will only be more.

And will homeowners actually take action? The real issue here is that there is limited incentive for those in foreclosure to do anything about it. Now that home values have plunged, many homeowners are “upside down” on their mortgages, owing more than their homes are worth, and having withdrawn all equity during the “boom times”. It’s becoming easier and more rewarding for the homeowner to just walk away. The proverbial ATM is empty.

As we all know, “what goes up, must come down”. By some accounts, home values are down for the first time since the Great Depression. Home values had skyrocketed over the past number of years, growing at a rate far exceeding average salary growth. So to afford the American Dream, citizens of America had to get into mortgages that overextended them, often getting into ARMs with low initial rates that were scheduled to reset, only delaying the inevitable. All for a chance at the American Dream! Can we blame them? And can we blame the lenders for trying to help (not saying that all lenders are selfless).

Even more disturbing is the natural propensity of our culture to use home equity as an ATM, forsaking all reason. It is not all lenders’ fault, even though it has become popular to point fingers at these “unscrupulous” bankers. These are just some of the reasons why we are in this mess. Call me cynical, but I really doubt that a 30-day time-out will do a whole lot.

Henry Paulson to Announce a Foreclosure Rescue Plan

Within the hour, Secretary of the Treasury Henry Paulson is due to announce the Foreclosure Rescue Plan. This plan is aimed at temporary relief to homeowners in foreclosure.  It mandates a 30 day “time-out” for those who are 90+ days behind in their payments. These 30 days will give the homeowners in default time to negotiate a win-win solution (or any kind of solution) with their bank. For now, Bank of America Corp., Citigroup Inc. and four other U.S. lenders will announce their alignment with this new plan.  It is not yet clear if other lenders will follow suit.  My guess is that they most certainly will.

More on this tonight!

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