Housing Rescue By Bankruptcy
Wednesday, January 21, 2009SUSIE GHARIB: One possible plan of action to help the housing market is being hammered out in Washington and could be rolled into the new stimulus bill. The idea is to force banks to bring down mortgage rates with bankruptcy judges as the court of last resort. Stephanie Dhue explains.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: It sounds like a smack down and to some creditors it may feel like one. But the term is cramdown and it means modifying a loan whether a creditor wants to or not. Democratic lawmakers want to change the bankruptcy code to add cramdown so judges can re- write the terms of a home mortgage. Michael Calhoun of the Center for Responsible Lending says without cramdowns, homeowners are not on equal footing with lenders.
MICHAEL CALHOUN, PRES., CENTER FOR RESPONSIBLE LENDING: For example, Lehman Brothers is in bankruptcy court right now. Its debts are being adjusted, but the sub-prime borrowers who got loans from Lehman Brothers cannot go into bankruptcy court today and get any relief on their loans.
DHUE: To get relief, a borrower would have to be in foreclosure and file for bankruptcy. If that borrower owes more than the home is worth, the judge could cram down the loan amount to the current market value and change the terms of the loan to create an affordable payment based on the lower amount.
CALHOUN: It's meant as the last resort to help people who aren't assisted through the voluntary modification programs.
DHUE: Recently, Citigroup dropped its long-standing opposition to letting bankruptcy judges modify first home mortgages, but most banks and servicers remain opposed. Scott Talbott chairs the bankruptcy coalition, a financial services industry group opposed to cramdowns. He says the proposed change will lead to higher mortgage rates for all borrowers.
SCOTT TALBOTT, SR. VP GOV'T AFFAIRS, FINANCIAL SERVICES ROUNDTABLE: The lowest interest rate is for mortgages which cannot be changed in bankruptcy. The entire system, the tax code, the bankruptcy code is designed to make it possible, to make it affordable for Americans to buy a home and this broad bill would undermine that entire mindset and allow for abuse by anyone who has a mortgage.
DHUE: Georgetown University law professor Adam Levitin says that's wrong. He says bankruptcy cramdowns would have only a small impact on mortgages rates.
ADAM LEVITIN, GEORGETOWN LAW: Historically, when there are major type of modification was possible in most parts of the country, it seems that in districts where you could modify that mortgage, interest rates were only on average 12 basis points higher. That's a very small change, but it's statistically significant, but small.
DHUE: The Obama administration supports changing the bankruptcy code to include cramdowns. The question is whether it will be included in the stimulus package Congress is trying to pass in the next month or in a housing package that would come later. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
