Judges as Bankers? Not Good.
If some members of Congress have their way, one aspect of the foreclosure prevention plan formerly shunned by lawmakers may be revived. It could spell bad news for banks should it come to pass: mortgage cram-downs. Essentially, the legislation would allow judges the right to rewrite a mortgage in order to make it more affordable to the current homeowner. While initially that may appear to be a good idea, critics point to several potential pitfalls:
1. Increased losses among banks. Currently, loan modifications among homeowners demonstrate dismal rates; in fact, nearly half are already falling behind. Critics point to a worsening of the current housing crisis that could spread on for years rather than putting the worst behind us and getting on with the future by selling the homes to those willing and able to make them profitable.
2. Restructuring may increase long-term competitive interest rates. By allowing a judicial mortgage modification on a "per case basis" there is fear it could slow the long term recovery of the housing market by driving prevailing market rates higher. Banks will no longer be able to justify mortgages on individual risk and will be required to offset losses in much the same manner as healthcare increases rates to compensate for write-off's.
3. Decreased lender incentives. Currently many banks are willing and able to negotiate new terms based upon individual situations but federal oversight could standardize what is/isn't expected.
4. Increased down payments. If passed, reform measures are also likely to increase the down payment requirements, PMI and other associated costs of obtaining a new mortgage in addition to the increased long term interest rates. Once individual assessments are not able to be adequately measured and predicted, lenders will be forced to compensate by adjusting all rates to the potential risk of under-writing less qualified individuals and homeowners.
5. Negative Incentives. To date, most mortgage modification programs have worked with current homeowners to restructure the interest rate, duration and other terms of the mortgage without impacting the principle owed. Increasingly, cram-down advocates are calling for the ability to totally re-write both the terms and principle amount of the mortgage owned creating the potential for a negative incentive. Because of this potential problem, advocates are also urging Congress to consider implementing more aggressive bankruptcy reform measures aimed to prevent both foreclosures and associated bankruptcy proceedings.
www.CheapHomesInSanMateoCounty.com
1. Increased losses among banks. Currently, loan modifications among homeowners demonstrate dismal rates; in fact, nearly half are already falling behind. Critics point to a worsening of the current housing crisis that could spread on for years rather than putting the worst behind us and getting on with the future by selling the homes to those willing and able to make them profitable.
2. Restructuring may increase long-term competitive interest rates. By allowing a judicial mortgage modification on a "per case basis" there is fear it could slow the long term recovery of the housing market by driving prevailing market rates higher. Banks will no longer be able to justify mortgages on individual risk and will be required to offset losses in much the same manner as healthcare increases rates to compensate for write-off's.
3. Decreased lender incentives. Currently many banks are willing and able to negotiate new terms based upon individual situations but federal oversight could standardize what is/isn't expected.
4. Increased down payments. If passed, reform measures are also likely to increase the down payment requirements, PMI and other associated costs of obtaining a new mortgage in addition to the increased long term interest rates. Once individual assessments are not able to be adequately measured and predicted, lenders will be forced to compensate by adjusting all rates to the potential risk of under-writing less qualified individuals and homeowners.
5. Negative Incentives. To date, most mortgage modification programs have worked with current homeowners to restructure the interest rate, duration and other terms of the mortgage without impacting the principle owed. Increasingly, cram-down advocates are calling for the ability to totally re-write both the terms and principle amount of the mortgage owned creating the potential for a negative incentive. Because of this potential problem, advocates are also urging Congress to consider implementing more aggressive bankruptcy reform measures aimed to prevent both foreclosures and associated bankruptcy proceedings.
www.CheapHomesInSanMateoCounty.com
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