Is Mortgage Cramdown Back on the Table?
Last week, amidst the hectic flurry of the election in Massachusetts and Obama's announcement of new regulations on banks, another announcement didn't get quite as much attention: the Obama administration will revamp the Home Affordable Modification Program (HAMP). The program will be streamlined, making it easier to file the necessary documents; for example, borrowers will be able to use pay stubs as proof of income rather than having to provide tax forms.
One of the most egregious policies is already in the process of changing – right now, the fine print of most mortgage modification contracts allows the lender to deny your application and resume foreclosing proceedings, without even informing you of the decision. It seems likely that the reason for this fine print is the hope that homeowners who don't know their home is headed to foreclosure won't file bankruptcy and access all the protections it affords them, including the ability to stave off foreclosure. Starting this months, lenders will have to provide written notification to anyone whose mortgage modification application is denied.
However, economists, mortgage experts, state regulators – basically anyone who knows anything about the subject – all say the same thing: the foreclosure crisis is not going to get any better until some form of principal modification, reducing the total amount a borrower owes on his or her house, is implemented. Nationwide, more than 25% of homeowners are 'underwater' on their homes – they owe more than the house is worth. And the government programs to help them have been woefully inadequate. The banks have modified a bare fraction of eligible mortgages – only 750,000 of an estimated 3-4 million eligible mortgage holders have received temporary modified mortgages. And that obscures the real number: only 31,000 have received permanent modifications. Some banks have been particularly reluctant to do modifications. Bank of America, for example, has modified a total of 98 mortgages.
Perhaps most ominously, rather than reducing the mortgage principal, more than 70% of loan modifications have actually increased the principal, by adding fees and past due amounts to it.
However, last week, Treasury officials quietly acknowledged that something needs to be done about underwater mortgages. The fact is, mortgage companies pretend to be willing to work with the administration to help homeowners with underwater mortgages but they drag their feet every step of the way. As has been discussed many times, the mortgage companies make more money on foreclosures than they do on mortgage modifications. What's the incentive for them to change their policies and modify more mortgages? Most experts agree that the only viable plan is cramdown, the process that will allow bankruptcy judges to modify primary mortgage loans in bankruptcy court. Mark Zandi, an economist with Moody's, says that will save 1.7 million homes from foreclosure. That's not because 1.7 million homeowners will file for bankruptcy but, under the threat of someone else modifying the loans, mortgage companies will finally move to actually do something about the problem.
Cramdown was resoundingly defeated last year: the Senate voted it down; the House voted for it once but defeated it in a second bill; the Obama administration made no effort to fight for it. But economic realities may force a reconsideration. A new wave of foreclosures could destroy the 'green shoots' that suggest the economy may be about to recover. It's nice to see that the Obama administration might finally be willing to help solve the foreclosure crisis in one place well-equipped to deal with it: the bankruptcy courts.