Food Fight

Every special interest group has been dipping its oar in the water, trying to maneuver the subprime mortgage "crisis" to benefit itdself and, ostensibly, its members. This weekend's edition of the National Mortgage News Daily Briefing (free subscription required) featured several prime examples.

First, we have consumer bankruptcy attorneys, who've been bemoaning the effects of the Bankruptcy Reform Act of 2005 since it was enacted. They now want Congress to amend the U.S. Bankruptcy Code to "make it easier  for consumers to refinance their subprime mortgage loans." They'd implement that "facilitation" by giving bankruptcy judges more power to restructure the loans. You know, reduce principal and interest rates and and other loan terms and force the revised terms down the throats of lenders.

Consumer advocates are urging Congress to amend the bankruptcy code so that homeowners can restructure high-cost loans and avoid foreclosure. The current code protects mortgage lenders, according to the National Association of Consumer Bankruptcy Attorneys, and does not allow the bankruptcy judges to reduce the interest rate or principal amount so that homeowners can successfully emerge from bankruptcy with affordable payments. As a result, more homeowners with subprime loans are forced to walk away from the homes, according to NACBA president Henry Sommer. "Help is urgently needed for hundreds of thousands of American families at risk of losing their home due to abusive home loans," he said. An NACBA survey shows that bankruptcy attorneys are finding that more of their clients have problems involving subprime loans. Half of the respondents said 50% of their clients with homes have mortgage-related problems, while 20% of the attorneys said 75% of their clients with homes have mortgage-related problems. The Consumer Federation of America and the Center for Responsible Lending joined the NACBA in calling for bankruptcy reforms.

Oh yeah, baby! A full-bodied "cram-down"! Not that weak-kneed, anemic cram-down consumer debtors now have. Let's give the judge the power to write down the unpaid principal and interest on the loan, reduce the interest rate, and extend the term, to whatever seems equitable. Lenders won't likely dissolve into apoplectic rage when that proposal surfaces in proposed legislation. Maybe that proposal has a chance. I'll phone my buddy Brian Boitano and ask him not only what would he do, but also whether he'd like to schedule a date to go ice skating in Hell.

Next up are the bankers' best friends at the National Association of Realtors, who think that the answer to this "mess" is for the FHA to step in and refinance all these bad boys. How to get the loan-to-value down to the FHA-required 97%? That's the beauty part. The lenders would forgive whatever amount of principal and unpaid interest that is necessary.

The Department of Housing and Urban Development could refinance distressed subprime borrowers into more affordable Federal Housing Administration loans in a prudent way that would not be a "bailout" for the lenders, according to the National Association of Realtors. The NAR is urging HUD to waive an underwriting requirement so the FHA can refinance borrowers who are behind on their adjustable-rate 2/28 and 3/27 mortgage payments. It is understood that the original lender would forgive a significant amount of the loan so the FHA can refinance at a 97% loan-to-value ratio reflecting the current appraised value of the property. "This would not be a bailout for lenders since they would incur significant losses," NAR president Pat Combs says in a letter to HUD Secretary Alphonso Jackson. Lenders generally lose $20,000 to $40,000 in a foreclosure. Mortgage banking consultant Brian Chappelle said there would be considerable lender interest in this program if it were implemented. A HUD official said the department has no comment at this time. "We believe FHA can design a mechanism where creditworthy borrowers could refinance subject to prudent guidelines and therefore avoid losing their homes," Ms. Combs said.

If I were to poll my clients on this one, I think the most common response I would hear would be identical to the sound of a watermelon hitting the sidewalk after a drop from a ten-story rooftop. Not only will that dog not hunt, he won't even eat. But thanks for thinking of us, NAR!

Finally, we have the political theater to be staged by a consumer housing advocacy group which, like the Doobie Brothers, is "Takin' It To The Streets."

Wall Street look out! The Neighborhood Assistance Corp. of America is planning to conduct protests and mock foreclosures at the homes of Wall Street and mortgage company executives -- demanding loan modifications for subprime borrowers who are facing foreclosure. Subprime adjustable-rate mortgages were "structured to fail" and "we are going to go into their neighborhoods" if they don't stop the foreclosures, NACA chief Bruce Marks said at a Washington news conference…

If NACA showed up at my home to stage a mock foreclosure, my "equitable remedy" to stop the mock foreclosure would not involve securing a temporary restraining order, but rather would involve a contest to see which is the most effective street cleaner:  a  Striker/Streetsweeper automatic shotgun with an 18" barrel and my own "special load" of blended double-O buckshot, ball bearings, and rusty razor blades, or my old standby, the M2A1-7 flamethrower. Perhaps I'll enlist my good friend John and, side-by-side, we'll compare results.

It's not pretty being a tool of Wall Street, but the fringe benefits are righteous.

Comments

[Wes M]

Thank you! Your post details what is wrong with this whole "restructuring" and "bailout" plan: I took the sane, appropriate, constructive loan. Why do I get to slog along under higher payments, slowly reducing my principal, while the "poor, uneducated, abused" sub-prime borrower gets his loan restructured and reduced? I'm sub-prime as well, and I fully understood exactly what I was signing...