February, 2009:

One arm of the government’s bank regulators has called for the thrifts  to halt foreclosures. Meanwhile, yesterday Treasury and HUD talked with the banking industry in search of ways to stem the cascade of foreclosures.

The thing that was striking was the uniformity of support for the idea that we can no longer rely on a voluntary system” under which the financial services industry leads the foreclosure prevention effort, said John Taylor, president of the National Community Reinvestment Coalition.

Halting foreclosures is a beginning to addressing the problem.  The government was once again suggesting buying up the pools of tainted mortgages as the end game.  Huh?

If there is a foreclosure in process, the homeowner doesn’t care who owns the note.  He needs a way to dig out of the mess, as to his house. While buying up toxic mortgages may, over time, restart lending, it will be too late for the borrower who is behind on a property that is now underwater.  There will be no new mortgage money for that family.  (Remember too what happened, or didn’t happen, when we gave banks money to restart lending).

In the absence of a solution that impacts existing homeowners, more houses go into foreclosure, depressing the prices of surrounding homes.  Properties are neglected, vacant, and sold at fire sales.  It hurts even families with sound finances.

Judicial mortgage modification snuck into the last paragraph of the Post’s story. I say let’s start there, and see if we  really need to relieve buyers of toxic mortgages.

Saving homes from foreclosure via the mortgage modification bill was the theme of the National Association of Consumer Bankruptcy Attorneys as they visited legislators on its annual lobby day February 11.  Members visited their representatives  about bankruptcy issues impacting constituents.

Matt Mason, NACBA board member, pointed out that some 160 homes a day went to foreclosure in Wayne County, Michigan.  Permitting loan modification under the supervision of a bankruptcy judge would allow borrowers to take responsibility and get money flowing to the lending banks.  Present bankruptcy  law prohibits changes to home loans but not to any other kind of secured loan.

HR 200 has been reported out of the House Judiciary Committee and awaits a vote on the floor.

The report on the Senate version of the stimulus bill is that it includes incentives and credits for new home buyers, but nothing that directly helps prevent foreclosures of existing homeowners.

Until we stop the slide of home prices, greased by foreclosures, new buyers will be hesitant to jump into the housing market.  Buy now without price stability in the market, and you too can own a house worth less than you owe.

Until we have the right to modify mortgages down to the present value of the property, I have a hard time advising clients with homes underwater to continue to pay on mortgages well over the value of the house.

Even with mortgage modification, the borrower is still looking at a home loan that equals the value of the house.  Depending on the monthly payment, this may not be wise for everyone.

But, unfortunately, I don’t have to do that analysis yet, because Congress is sitting on the Helping Families Save Their Homes in Bankruptcy Act.

Not only are 14% of homes in Santa Clara County worth less than the debt on the property, 27% of houses purchased in the last five years are underwater according to the San Jose Mercury.

In my practice I’m seeing a substantial number of long time homeowners who have refinanced loans that are either now larger than the property value or whose loans will soon reset to payment levels that will be fatal to continued home ownership.

This problem is huge and requires immediate attention.  Without a solution, the mortgage morass will drag down all the homeowners around the  currently underwater homes.

We have incorporated the provisions of HR 200 into the text of the affected sections of the Bankruptcy Code on our sister site, www.savehomewithbankruptcy.com.

You can see exactly how each section will read if the bill is enacted as it was reported from Committee.

The unanswered question is how long do we have to wait for enactment?

The New York Times editorial cried “Shame” on the administration for taking the bankruptcy mortgage amendment out of the stimulus package now in the Senate.

It is unfair to ask taxpayers to pay for foreclosure relief without enacting a bankruptcy fix, which costs them nothing.

Amen.