February 19th, 2009:

Obama Speech: Help For Homeowners

Feb 19th, 2009
by Doug Jacobs.
No comments yet

President Obama made a nice speech yesterday in Arizonian.  He spoke about the mortgage crisis and the need to help homeowner.  And he identified a new plan to do that.

The ideas presented focus on encouraging lenders to modify mortgages.  It sounded, to some extent, like the same old rhetoric: “the mortgage companies can voluntary work with home owners to reduce payments and interest rates.”  But looking more carefully, the President introduced a couple of new ideas into these programs.

Yes, the programs are still voluntary, but, in this plan there are actual economic incentives to the mortgage companies to work with homeowners.  Additionally, the Treasury Department will develop uniform guidelines for loan modifications, as well as require all financial institutions receiving government funds to participate in the program.   These are major incentive to get some help to homeowners.

And if those programs don’t work the plan still calls for legal changes to allow judges to modify mortgages during bankruptcy.  The “Helping Families Save Their Home in Bankruptcy Act of 2009” is still very much alive.

Mortgage modification won’t increase cost of home loans

Feb 19th, 2009
by Cathy Moran.
No comments yet

Opponents to legislation to allow bankruptcy judges to modify home mortgages scream that such a prospect would raise the cost of everyone’s home loans in the future.  If contract isn’t sacrosanct, they argue, lenders will have to raise the interest rate to cover the risk.  Pretty scary stuff, if true.

But the claim is wrong on two scores.  First, the bill reported out of the House Judiciary Committee applies only to loans on the books when the law is enacted.  It will have no application to loans made in the future.

Second, an academic study last year looked at the impact of bankruptcy loan modification in the period when it was permitted and found very slight impact on interest rates.  “Mortgage markets are largely indifferent to the risk of bankruptcy modification.”

Remember that the risk of judicial modification already exists for lenders on vacation homes, rentals, and commercial buildings.  Those credit markets seem to have survived and prospered (before the current debacle) in the face of possible modification.

Then, I suppose, we have to ask what is the cost to future homebuyers if we don’t stop the collapse in the housing market.