Senators Schumer, Durbin, Representative Brad Miller (D-NC) and others are introducing bills as part of the stimulus package to allow homeowners to have their mortgages reduced by a bankruptcy judge. The MBA (Mortgage Bankers Association) oppose such “cram downs” arguing that they will destabilize the housing market!
According to the MBA, cram downs will jeopardize future loans since the lenders will need to ask for a high-risk premium to protect them from bankruptcy modification. Such premiums would be in the form of higher fees, interest and down payments. This argument ignores the fact that low house prices greatly reduce foreclosure rates. The MBA apparently wants a return to escalating house prices.
Until recently, homeowners were paying huge expectation premiums on houses. Such premiums were paid for a “guarantee” that house prices would go up and the house would be an “investment.” The MBA seemed little concerned that such escalation would eventually result in the collapse of the housing market. Nor did they consider the risk of the subprime market.
Reducing foreclosure will be immediate benefits of cram downs. Foreclosures not only wreak havoc on families, they impact the whole community. Abandoned houses are an eyesore and promote crime. Laws permitting lenders to foreclose and not take possession should be eliminated. Writing-off a property from a balance sheet may be profitable to the lender, but it’s a burden to the community. At least rent it to the previous owner.
Cram downs are a start to creating affordable housing. What is needed next is a method to write-down mortgages without going into foreclosure and Chapter 13 Bankruptcy. Legislation should be passed to permit refinancing that would modify a mortgage to market (mark-to-market). This is only fair to those who have avoided foreclosure and bankruptcy.
Economic downturns are self-perpetuating. If nothing is done, increasing unemployment can only increase foreclosures. According to the Huston Chronicle, school construction is being delayed because the housing market prevents families with school age children from moving into school districts. Huston’s situation is not different from many cities and state that are seeing their tax-base erode, and projects halted with resulting layoffs.
We have an opportune moment to improve our economy. A functioning housing market is necessary to eliminate “frictional” unemployment—that produced by immobility in the job market. The public work programs started by the stimulus should become permanent. Making housing affordable permits raising state and city taxes to build infrastructure while lowering net monthly payments. Without the constant escalation of price and the resulting expectation premium, house prices can truly become affordable.
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