Editore"s Note
Tilting at Windmills

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January 18, 2008
By: Kevin Drum

FORECLOSURE....Fromer Republican HUD secretary Jack Kemp takes to the pages of the LA Times today to tell us that federal bankruptcy law treats businesses better than people:

Bankruptcy law is wildly off-kilter in how it treats homeownership. Under current law, courts can lower unreasonably high interest rates on secured loans, reschedule secured loan payments to make them more affordable and adjust the secured portion of loans down to the fair market value of the underlying property — all secured loans, that is, except those secured by the debtor's home. This gaping loophole threatens the most vulnerable with the loss of their most valuable assets — their homes — and leaves untouched their largest liabilities — their mortgages.

Can't say I'm surprised by this, especially considering the Enron-esque ideology that's been running the country for the past decade. As a fix, Kemp recommends quick passage of the bipartisan Emergency Home Ownership and Mortgage Equity Protection Act, which he estimates might help 600,000 homeowners avoid foreclosure and keep their houses. I don't know if he's recommending this on its own merits or because he's lobbying for someone or other, but either way it sounds like a good idea. The sooner the better.

Kevin Drum 12:04 PM Permalink | Trackbacks | Comments (25)

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I don't know if he's recommending this on its own merits or because he's lobbying for someone or other.

You know, you'd think our press would be interested in questions like these, and maybe give us a clue before publishing stuff on their op-ed pages -- except they aren't and they don't.

Posted by: David in NY on January 18, 2008 at 12:20 PM | PERMALINK

Lobbying for someone?

Like who, Joe Six-pack?

None of the monied interest would gain from that which is how that change made it into the law in the first place.

Posted by: Napoleon on January 18, 2008 at 12:20 PM | PERMALINK

From a Republican? Gotta be a catch somewhere

Posted by: iggy on January 18, 2008 at 12:21 PM | PERMALINK

EHOMEPA? They'll have to think of a catchier acronym than that to get 'pubs to vote for it.

Posted by: Bret on January 18, 2008 at 12:24 PM | PERMALINK

Actually, Jack Kemp has shown genuine concern for poor folks over the years. His complaint could actually be inspired by compassion.

Posted by: jbd on January 18, 2008 at 12:26 PM | PERMALINK

Not only would the monied interests not benefit, this change would hurt them. Many get paid on transaction, so keeping people in their existing homes while lowering their payments will reduce the cash flow and eliminate the fees they collect when they acquire the home equity.

Why, why, that is practically un-American.

I am sure Bush would suggest instead a Federal bailout of the mortgage industry where the US government makes up the difference plus more.

That is how Republicans address problems like this.

Posted by: Tripp on January 18, 2008 at 12:27 PM | PERMALINK

Uh-oh. Ms. Malkin is going to be angry about Kemp's column.

Oh, hell, who am I kidding. Ms. Malkin gets angry when she is reminded that water is wet, that the the sun rises in the east, and that bears regularly defecate in the forest. Why would this be any different?

Posted by: Quaker in a Basement on January 18, 2008 at 12:30 PM | PERMALINK

As a fix, Kemp recommends quick passage of the bipartisan Emergency Home Ownership and Mortgage Equity Protection Act, which he estimates might help 600,000 homeowners avoid foreclosure and keep their houses.

At first glance, this sounds like a good bill. But as the Mortgage Bankers Association persuasively explains, this bill would increase the price of a new home by an average of $2,204 or about $183 per month. So we should reject this bill and instead pass a bill which simply bans predatory lending because your bill would make it more difficult for poor people, especially racial minorities like African Americans, from buying new homes.

www.bizjournals.com/denver/stories/2008/01/14/daily4.html

"A proposed change in the U.S. bankruptcy law that would allow bankruptcy courts to write down the value of home mortgages would have cost Colorado home buyers more than $2,204, or about $183 per month on average, if it had been law in 2006, the Mortgage Bankers Association said Monday."

"said MBA Chairman-elect David Kittle. "But this law will, ironically, create future difficulties by increasing mortgage costs. To help consumers, Congress should finish work on modernizing the FHA and pass a predatory lending bill that provides uniform protections for all consumers. Congress should not change the bankruptcy laws to increase costs on every new mortgage.""

Posted by: Al on January 18, 2008 at 12:31 PM | PERMALINK

For all of Kemp's other faults (and they are legion), he does genuinely believe that home ownership is the cornerstone of being an American citizen. That's one of the reasons he got in trouble as the head of Housing and Urban Development in the Reagan administration -- he started drafting policies to help increase home ownership in impoverished urban areas, and Republicans were horrified. Kemp was trying to help black people instead of steering all of that money to boondoggles run by His Own Kind!

Posted by: Mnemosyne on January 18, 2008 at 12:36 PM | PERMALINK

Last decade? The provision is one used in Chapter 13 reorganizations (where debtors pay their debts over a period of time - usually 5 years), and has been in effect longer than the past decade.

Loan modification is generally not available in Chapter 7 cases as a matter of course because its a liquidation of the debtor's assets, thus modification of loans are 'unnecessary' for the reorganization of the debtor's affairs (since there's no reorganization). Fixing the Chapter 13 problem is a finger in a leaky dam.

Most debtors still qualify for Chapter 7 cases in spite of the 2005 modifications, they just don't know it. When the secured debt payment is factored into the 'means test' the higher mortgage payments actually help them get in the Chapter 7 door.

It's what happens next that screws them. They can either reaffirm at the higher rate and keep the house (along with the crappy payment), or they can lose the house. The ability to modify the mortgage should be implemented for BOTH chapters, because in reality for people living paycheck to paycheck a Chapter 13 is simply not viable - any money saved on a lower mortgage payment just goes to pay other unsecured creditors anyway.

The reason businesses can do it in bankruptcy is because they file under Chapter 11 which is just a more expensive Chapter 13. So the initial representation in the article is a bit misleading (though probably not intentionally so, and is more likely just from a fundamental misunderstanding of the law). And as for reducing the secured claim in a chapter 13 to match the value of collateral, that is correct. Except the amount of the loan that is reduced then becomes an unsecured claim which has to be paid (in whole or part) through the Chapter 13 plan payments.

The bottom line is that changing it for Chapter 13 isn't really going to help all that many people, because the ones most greatly affected by the mortgages (at least insofar as it pushes them to bankruptcy) are the ones that are loaded up with unsecured debt too - these are the people that need to liquidate (which is a misnomer since most assets are exempted, but that's a whole other discussion) and start fresh under a 7.

The point is that changing the modification provision will only have the desired benefit if it's made applicable across the board. And unless there's a complete overhaul of secured debt treatment (at least in terms of mortgages) any quick fix can only address loan term modification such as reducing interest rates. Lowering the AMOUNT of the claim, as can be done in Chapter 11 and for non-residential mortgage debt in a Chapter 13, requires a lot of statutory revisions and potentially upsets the balance of power between creditors in a bankruptcy...but I've already written too long a post so will stop there.

Posted by: Pete on January 18, 2008 at 12:40 PM | PERMALINK

People upside down on mortgages, who also have little or no equity, do not need to declare bankruptcy to walk away from their bad investments. They should stop making payments and let the mortgage holder foreclose to end their debt.

Kemp wants to prevent people from defaulting on mortgages for homes not worth the prices paid to save the mortgage holders. Wall Street, banks and politicians fear people will become like them and disregard debt obligations. That will ruin their schemes of eternal debt indenture for the consumer.

Posted by: Brojo on January 18, 2008 at 1:15 PM | PERMALINK

Auto loans aren't in good shape either
There were lots of people who were offered new car loans that added in their outstanding balance on the old vehicle so they now owe far more than the new one is worth.

Posted by: Mike on January 18, 2008 at 1:30 PM | PERMALINK

Gotta say, Jack Kemp still is the kind of Republican I can like. I wouldn't vote for him, but I sure do respect him and his principles. He really wants to use Conservative political ideals to serve ALL people. Its not gamesmanship or word play for him, he really does mean it.

Is it any wonder he never really caught on in his party?

Honestly, this is a good, incremental improvement to the awful bankruptcy laws. It doesn't fix everything, but its a reasonably achievable step forward and structured with a compelling message that puts the opposition in a very awkward place. And the fact that Jack Kemp proposed allows Dems to take the mantle of bipartisanship and run with it. He just gave the Democrats a huge gift and I hope they don't turn their noses at it. It may be a band-aid for now, but it'll give them time and momentum to make more substantial changes in the next Congress.

Posted by: BStu on January 18, 2008 at 1:56 PM | PERMALINK

Doesn't our mechanism for creating such laws work something like this:

(1) Right wing think tanks decide what they want to do.

(2) Right wing think tanks figure out how to package (1) as some basic fairness sounding principle.

(3) It gets passed.

(4) After a few years we see that the effects had nothing to do with the innocent sounding arguments in (2), but are in fact (1).

Posted by: bigTom on January 18, 2008 at 2:19 PM | PERMALINK

Alternatively, we could allow individuals to declare bankruptcy and just reincorporate under a new name. So, John Smith could get a fresh start and be back in business as James Smythe. Real estate developers do it all the time, so I don't see what the problem would be.

Posted by: Joe Bob on January 18, 2008 at 2:29 PM | PERMALINK

Kemp is an interesting Republican't. Good to hear from him again. He's always had more reasonable economic view than your average "cut tax to zero to increase revenues" ReThug.

Posted by: Cal Gal on January 18, 2008 at 5:04 PM | PERMALINK

Cal Gal,

Kemp was one of those 80's R's and was quite a bit different than the crop associated with Gingrich and then Bush. I consider myself a Democrat, but I used to vote for Republicans from time to time. I voted for Kemp in the Republican primary in 1988.

Posted by: Doc at the Radar Station on January 18, 2008 at 5:44 PM | PERMALINK

Average Joe - fail to make smart financial decisions and lose your home.

Countrywide CEO Mozilo - fail to make smart financial decisions for the company you run and walk away with $110 million while average Joe's lose their homes.

Corporatism at its finest.

Posted by: arteclectic on January 18, 2008 at 6:58 PM | PERMALINK

Let us not forget that Mr. Kemp was a football player long before he became a political hustler.

You know, lots of knocks on the head etc

"The human race has one really effective weapon, and that is laughter." - Mark Twain

Posted by: daCascadian on January 18, 2008 at 9:29 PM | PERMALINK

Big Tom re: our mechanism for creating such laws
do not be so naive. Right wing think tanks have no independent principles.

1) should read "billionaires and CEO's decide what they want to do"

2) Right wing think tanks figure out how to package (1) as some basic fairness sounding principle.

etc.

Do not be so

Posted by: Economaniac on January 18, 2008 at 9:43 PM | PERMALINK

Generally, this is one thing where the big money usually benefits from this law...

...Except now, as home loans melt down, foreclosures on homes are bad. There are many banks right now which would suddenly not want to be the proud owners of empty homes (or empty loans) and rather have this 'fixed'.

Of course, they did buy this law to begin with. It's just biting them on the ass now.

Posted by: Crissa on January 18, 2008 at 10:14 PM | PERMALINK

Way for Older Homeowners To Back Out of a Bin
1/8/2008
Source: Kelly Greene, The Wall Street Journal

Reverse mortgages used to be a way for homeowners to get extra cash during retirement. Now they're also being used for a more-pressing purpose: helping people who are struggling to meet payments on high-interest-rate loans to keep their homes.

The strategy, which is relatively novel but gaining popularity among legal-aid attorneys and housing advocates around the country, calls for persuading lenders to take the cash generated by a reverse mortgage in lieu of foreclosing on older homeowners.

With a reverse mortgage, the bank makes payments to the homeowner instead of the homeowner making payments to a bank. The loan is repaid, with interest, when the borrower sells the house, moves out permanently or dies. The products are complex and have high fees -- typically about 7% of the home's value -- and they make it difficult for homeowners to leave the property to their heirs. But they may be the best option for people who have built up equity in their home and would otherwise lose it.

Most of these older homeowners in trouble had refinanced their home into so-called subprime mortgages. Such loans -- many of which feature adjustable rates that can tack sharply higher after an initial teaser period -- have roiled the mortgage industry and credit markets this year as default rates have shot up, and analysts expect hundreds of thousands of additional subprime loans to go bad over the next several years.

While no one tracks subprime mortgage holders by age, the approximately 30 million Americans 65 and older who own their homes are routinely targeted by subprime lenders with refinancing deals, borrower advocates say. Given that the rescue plan recently proposed by the Bush administration and the mortgage industry doesn't provide relief for individuals who can't afford their current loan terms, reverse mortgages are currently one of the few tools available to help older homeowners facing foreclosure.

The strategy worked recently for Gloria Forts, a 62-year-old retired federal worker in Forest Park, Ga., a suburb of Atlanta. After refinancing her home in August 2006 with a $106,500 mortgage from Fremont Investment & Loan in Brea, Calif., Ms. Forts was facing monthly payments of $950.41. That consumed 70% of her monthly income from Social Security and a pension. Intending to start a new job, she found herself kept at home by diabetes complications and back surgery. In June, she sought help from the Atlanta Legal Aid Society.

There, she found William J. Brennan Jr., a veteran housing attorney who, over the past 18 months, has developed a sophisticated model for settling subprime debts with reverse mortgages. After Ms. Forts received a foreclosure warning in October, Mr. Brennan connected her with Genie McGee, a reverse-mortgage specialist with Financial Freedom Senior Funding Corp., an Irvine, Calif., unit of IndyMac Bancorp Inc. She determined that Ms. Forts would qualify for a reverse mortgage of about $61,000.

Mr. Brennan sent Fremont's loss-mitigation department a letter proposing that the company agree to take that sum and cancel its plans to foreclose on the house. On Dec. 3, the day before the foreclosure sale was supposed to take place, Fremont agreed to the deal and stopped the foreclosure.

The transaction illustrates one of the biggest challenges in getting lenders to accept payouts from reverse mortgages: taking less money than the house may be worth. In the 14 cases Mr. Brennan has settled to date, lenders have accepted payments for an average of 65 cents on the dollar. Mr. Brennan contends that the loans -- typically mortgage refinancings or home-equity loans with high interest rates and monthly payments that gobble up more than half of the borrowers' fixed income -- should never have been made in the first place. Lenders, he says, "have been making loans regardless of the borrowers' ability to pay, and there needs to be a penalty for that."

When Mr. Brennan first attempted to broker such settlements a few years ago, he hit resistance from mortgage lenders who were unwilling to accept reverse mortgages as full loan repayment instead of foreclosing on properties they could sell outright. He finally started getting traction when Georgia Sen. Vincent Fort, an Atlanta Democrat who pushed state legislation to damp predatory lending, personally called the executive offices of the banks involved.

Now, with real-estate markets struggling, more lenders may be willing to entertain reverse-mortgage payoffs. "If there's a way to settle the debt that nets the investor more than it would get if there was a foreclosure and a sale, then the servicer would look at it," says Thomas Kelly, a spokesman for J.P. Morgan Chase & Co., whose Chase Home Lending unit services more than $700 billion in mortgages. (Chase was the trustee on one mortgage loan Mr. Brennan settled, though another bank has since acquired that business.)

A spokeswoman for Fremont General Corp., Fremont Investment & Loan's parent, declined to comment about Ms. Forts's settlement. The Federal Deposit Insurance Corp. issued a cease-and-desist order against Fremont in March, in which it said it had determined "that the bank had been operating without adequate subprime mortgage loan underwriting criteria, and that it was marketing and extending subprime mortgage loans in a way that substantially increased the likelihood of borrower default."

Other public-service attorneys around the country are turning to reverse mortgages as a way to negotiate lower payoffs for subprime loans made to older clients. In Chicago, for example, "we advise a lot of clients that a reverse mortgage is appropriate when it's the only way to keep them in their home," says Michelle A. Weinberg, a supervisory attorney at the Legal Assistance Foundation of Metropolitan Chicago. "The same people have been refinanced over and over again to very little benefit for themselves, with high fees."

But the strategy may not be suitable for every homeowner in trouble. "We've helped a handful of people get refinanced with reverse mortgages," says Jessica Attie, co-director of the Foreclosure Prevention Project at South Brooklyn Legal Services in New York. "We'd like to do it more, but a lot of times we find that they have too much debt on the property to qualify."

In Washington, the National Council on Aging, an advocacy group, has launched a reverse-mortgage initiative to help older homeowners around the country learn how to use the product appropriately -- including ridding themselves of monthly mortgage payments.

"Conventional mortgage loans, whether they're subprime or not, are risky for seniors because they have to make that monthly payment from a fixed income," says Barbara Stucki, the initiative's director. "If anything gets out of whack, they are in danger of losing their home." Recent studies have found that the portion of households age 65 and older with mortgage debt increased to 22% in 2004 from 15% in 1989, and increased in dollar terms to $47,000 from $15,000 per household. An AARP study released earlier this month found that nearly one-third of 946 reverse-mortgage borrowers surveyed used the loans to pay off existing mortgage debt.

"For a small but crucial number of potential borrowers who are in financial distress, reverse mortgages can be essential in avoiding foreclosures -- sometimes on subprime or home-equity loans with very high interest rates," the AARP report says.

Elizabeth Renuart, a staff attorney at the National Consumer Law Center in Boston, reviews hundreds of mortgage documents annually, and says that the adjustable-rate mortgages she has examined this year that she considered "to be made inappropriately were almost entirely made to people over 60. To me, that's a very shocking revelation."

Mr. Brennan in Atlanta is regularly giving speeches to and fielding calls from legal-aid lawyers around the country who want to use reverse mortgages to relieve older homeowners of their mortgage debt. "There has to be a way to systemize this strategy," Mr. Brennan says. "Every senior in America should be able to use a reverse mortgage to get out of these subprime loans."
Write to Kelly Greene at kelly.greene@wsj.com

Posted by: Pocket Rocket on January 19, 2008 at 1:17 AM | PERMALINK

What's so great about Kemp's idea? People who are being foreclosed for the most part didn't save for a downpayment. They signed mortgages they couldn't afford unless the housing bubble continued, the economy continued to expand, and interest rates on ARMs stayed at all-time record lows.

Now, Jack Kemp says there should be no consequences for irresponsible purchasing behavior. He encourages people to believe the government will ride to the rescure when you buy a house that in normal times was well beyond your means and then use inflation on that asset (along with a re-fi or two) to borrow against it and buy goods and services you normally wouldn't be able to afford either.

Consider the citizens of every other industrialized country and note Americans have the lowest saving rate. The lesson here should be DON'T BUY THINGS YOU CAN'T AFFORD.

Posted by: DevilDog on January 19, 2008 at 1:25 AM | PERMALINK

BTW, I agree with those above who recommend rescinding the bankruptcy law. But it's one thing to take away protections for loan sharks (the financial/mortgage-lending industry) and something else altogether to bail out irresponsible consumers, which as arteclectic surmised, ulitimately serves to bail out the corporations that used fraud and questionable lending practices to create this mess.

Posted by: DevilDog on January 19, 2008 at 1:41 AM | PERMALINK

As a fix, I recommend overturning the foul Bankruptcy Bill of 2005, and putting in its place some actual regulation of the financial industry, as opposed to the laughable laws that have been enabling usury and outright fraud that Old Mother Reagan and his ilk have been foisting on us since the 80's.

Posted by: Riggsveda on January 19, 2008 at 3:48 AM | PERMALINK




 

 

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