The Principal Pay Down Plan, conceived by Norma Hammes, a San Jose bankruptcy lawyer, and promoted by NACBA, would allow homeowners in Chapter 13 bankruptcy with an underwater mortgage to direct up to five years of their payments on the mortgage to the reduction of the principal outstanding.  The plan would not otherwise change the mortgage terms.

As proposed, the plan would only apply to home loans owned or controlled by Fannie and Freddie, which make up about 90% of U.S. mortgages.

By devoting five years of payments to principal, homeowners, who now have few economic reasons to keep paying on debt tied to houses with shrunken value, could build up equity and a financial stake in otherwise overencumbered homes.

It’s our opinion here at NorCalMortgageMods that a recovery of the California economy is tied, top and tail, to the housing market.  Congress failed to pass the judicial mortgage modification bill for bankruptcy relief to homeowners two years ago.  The Administration’s encouragement of mortgage modification has been insipid and ineffectual.

If this plan doesn’t suit the White House, what is their proposal?

The Times cited a report that analyzed the troubled homes from 2004 to 2008 and found that at least 2.7 million mortgages made between 2004 and 2008 have ended up in foreclosure and that there are nearly another 4 million in the same category.

According to the Times: “Put another way, ‘The nation is not even halfway through the foreclosure crisis.’”

The report, produced by the Center for Responsible Lending, also noted that certain types of loans have much higher rates of completed foreclosures and serious delinquencies. They include loans originated by brokers; hybrid adjustable-rate mortgages, option ARMs, loans with prepayment penalties and loans with high interest rates (subprime).

There’s additional analysis in the report which provides data about the impact this problem is having on minorities.
All in all, the foreclosure crisis is continuing.

image credit:  FlickreviewR

The expectations for the impact of the program, however, are not high.

The New York Times reports that the original program promised help to 4 to 5 million homeowners.  Perhaps, 900,000 have gotten refinances, and few of those turned out to have underwater properties.

Image courtesy of Wikimedia.

NACBA has proffered a principal pay down plan which it hopes can be implemented without legislation.  The plan would utilize bankruptcy’s  Chapter 13 and would be a consensual provision of the Chapter 13 plan.  In exchange for crediting every mortgage payment during the plan to principal, the lender would get a new promissory note and a  release of  claims for past lender transgressions.

Stay tuned.

All you need to do is take one look at a voluminous pooling and servicing agreement on the Security and Exchange Commission’s website to see just how much legalese was used to cover their proverbial back sides.  I took a look at one for a client just the other day and it was over 700 pages long.

One of my favorite pieces to this puzzle is looking at the power point presentation given to the SEC by the Mortgage Bankers Association in 2004.  Take a look at pages 11 and 12 detailing the problems the Mortgage Bankers Association saw and their proposed changes to solve the problems.

Big banks have done such a good job driving up dividends to shareholders by taking control of the market and finding every opportunity for arbitrage that it will take at least a century for the American people to regain any amount of faith in the system.  When debtors and creditors alike are up in arms wondering what has gone wrong, someone or some thing really pulled a fast one on us all.

As consumers try to negotiate this mess, they will believe nothing they are told and resort to good old fashioned sayings I remember my grandfather uttering  like “I don’t trust him as far as I can throw him.”

Of course the courtroom is open to bring these folks to justice one at a time.  But justice is expensive and often as economically wasteful as the tactics used to create the claims.  The bankruptcy court would be as good a venue as any to deal with these issues in turn, providing for a compromise and valuing a homeowner’s property at the market value.  It may not be a complete solution but it sure would get people focusing on what is important again right quick.  And that, my fellow Americans, would buy us all more than any $600 billion bail out ever did.

A bipartisan group of Representatives will offer an amendment to H.R. 4173 to allow bankruptcy judges to modify the loans of homeowners in a Chapter 13 Bankruptcy.  This amendment is very similar to H.R. 1106, the bill that went down to defeat last spring.

If passed, many homeowners will be able to keep their homes by filing a Chapter 13 Bankruptcy.  The Judge will be able to change the terms of the loans on the house by adjusting the interest rate, the length of the loan, and even the principal owed.

The Government’s voluntary mortgage modification programs have been a dismal failure. What is needed is this unbiased look at the situation with the teeth to force lenders to do something.

Although, simply bringing an amendment to an existing bill is a long way from passage, it does give hope to homeowners fighting to save their homes.

It’s estimated that a cramdown law could reduce foreclosures by 20 percent. It would cut through red tape by forcing reasonable compromises in bankruptcy courts, which can already modify mortgages on second homes and yachts. Most important, it would provide that all-important stick: Modify more mortgages, or a judge will do it for you.

Certainly, the experience of my clients supports the national numbers.  While clients may be offered trial modifications (send us money while we shuffle your papers again), I’ve seen one permanent loan modification.

It’s depressing to repeat to clients that they have little or no negotiatino power with the lenders.  It continues to be depressing to the economy as the amount of bank owned real estate increases.

As the recession has played out, foreclosure is no longer just the  consequence of sub prime loans and over heated real estate market.  It’s reaching a much broader swath of families.  Falling home values make it economically rational to walk away from underwater properties.

We would all benefit from a legislative “stick” to balance the HAMP plan’s “carrot” for mortgage modification.

As the momentum continues in the judiciary committee to revisit legislation to allow bankruptcy judges to modify mortgages in the context of a Chapter 13 bankruptcy, the mortgage industry is writing letters to the editor of the New York Times to slow down or stop the bill.

David G. Kittle, Chairman of the Mortgage Bankers Association wrote that the modification process has helped 4.5 million homeowners!  How they have helped these people stay in their homes is unknown since the experiences of the non-mortgagers are quite the opposite: that some people have been helped, but, only a fraction of those receiving foreclosure notices.

None the less, Mr. Kittle warns that allowing a bankruptcy judge to modify a home loan will increase bankruptcy filings, and be bad in the long term for the economy and the mortgage industry.  Of course, what he doesn’t say is how bad not allowing such modifications is in the short term with the rising foreclosure rate and families losing their homes now.

The voluntary modification programs have helped some homeowners.  Just not nearly enough. We still need someone to mediate and put some teeth into the process.  Bankruptcy judges are the logical alternative.

Although this was just a preliminary discussion in the Judiciary Committee meeting, it bodes well that this legislation will be brought again.

The Obama modification plans and similar California laws haven’t yielded the relief intended. They remain voluntary so if the lender doesn’t offer a viable arrangement to the homeowner, nothing happens.  A law allowing a judge to oversee the process and put some teeth into it will go a long way to force both the lenders and homeowners to seek a middle ground fair to everyone.  Only in that way, can we stem the foreclosure tide.

As before, the Republicans and some “blue dog” Democrats are likely to oppose the legislation, but as foreclosures continue to rise, homes become more and more “up-side down,” and the current economic down-turn continues, there is hope for this new act.

Recently, the government relaxed the standards for receiving a mortgage modification to include homeowners whose loans exceeded the value of their homes by up to 25%.  As home values continue to decline, more people can now qualify.  But is the system doing anyone any real good?

First of all, it’s not easy to get a modification because of the stringent requirements placed on the process by the lenders.  But even after you navigate through the process the modification you might receive may not do you any real good.  Take a look at the excellent article on the Mortgage Law Network by my friend, David Leibowitz.

And what we are seeing now is that even homeowners who received a modification are defaulting months later.  The Motley Fool says the currently-available home mortgage loan modification programs are ineffective, citing “pathetic” statistics from federal loan regulators that half of the modified loans were in default again three months later. Typical modifications now consist of lowering interest or tacking missed payments onto the back end of the loan.  A scant 1.8% of modifications involved principal reductions.  Thus, as home values decline there is much less incentive to make house payments when you aren’t building equity in the property.

Without judicial oversight, the current modification programs just seem to be delaying the inevitable.