The Wall Street Journal recently reported an update on mortgage aid from the federal government (see WSJ article). The article reports that the Obama administration “will launch its most ambitious effort at reducing mortgage balances for homeowners who owe more than their homes are worth.”
Federal government officials estimate that between 500,000 and 1.5 million loans could be modified through the program. Personally, I am not optimistic. My guess is that the system is going to be overwhelmed and few of the people that need the help will actually receive it. The WSJ reports that “the same knots that tied up prior initiatives could do so again. ”
A summary of how this program will work is that the banks are going to agree to write down the underwater loans and then pass them off to the federal government. It is important to note that the banks are not going to be forced to negotiate. As a result, I think we will continue to see a rise in foreclosures.
Its too bad the bill that would have allowed consumers to write down their first mortgages in bankruptcy court did not pass. The foreclosure meltdown could have been avoided.
The problem is that the banks that services the loans do not own the mortgages. As a consequence, they don’t really have the authority to agree to any modification without approval of the companies that own the bonds that are backed by the mortgages. A further complication is that the bondholders could potentially sue the company that sold them the bonds in the first place if there is a decrease in the interest rate or principal payments. Bankruptcy Court would have the best place to cut through this Gordian Knot. If judges were given the authority by Congress to modify the loans, no mortgage service company or bond company would be liable for the modifications. With the current foreclosure meltdown, no one is winning. Someone loses their home. The banks get stuck with house that they can’t sell because the market is so bad. Bondholders get nothing from an empty house. House values drop as a result of the foreclosure and the entire neighborhood suffers.
The article goes on to point out that this new program does not deal with second mortgages. Most Georgia clients I see that are about to lose their house to foreclosure also have a second mortgage. The good news is that in some Chapter 13 bankruptcy cases, we can wipe the second mortgage. I’ve posted a link to a blog I wrote on this topic below.