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Toxic home mortgages hurt 'responsible' families, too


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POSTED: Sunday, March 01, 2009

LAST Wednesday, President Obama laid out a comprehensive housing plan, designed to reduce the foreclosures that are threatening families and destroying neighborhoods in Hawaii and across the country. The numbers are shocking: 46,000 home foreclosures are filed each week in this country. The Center for Responsible Lending estimates that 2 million homes are at risk of foreclosure over the next five years. As a bankruptcy attorney in Hawaii, I see a daily parade of families losing their homes to foreclosure. These include hardworking families who play by the rules, own homes that have become unaffordable and over-mortgaged due to declining real estate values due to circumstances beyond the their control and families who were sold toxic mortgage products with exploding adjustable rates (which adjust only upward) even though they qualified for conventional mortgages.

Fortunately, Congress is now considering two bills - S.61 and H.R.1106 - that can help save these homes at no cost to taxpayers. These bills would allow bankruptcy judges to modify residential home loans.

The lending industry - with a few notable exceptions - opposes this practical, sensible legislation. And the arguments it has put forward are laughable. They talk about the sanctity of contracts. Yet corporate America - including many of the very financial institutions that have led us to this disaster - have no compunctions about running into bankruptcy courts to modify their own contractual obligations, or holding out their hands to the Treasury Department hoping to receive tens or hundreds of billions of taxpayer dollars to “;encourage”; them to restructure and re-amortize loans or, better yet, purchase at inflated prices the toxic loans they created and service, but now do not want any part of.

They also claim that judicial modification will cause mortgage rates to go up. That argument is patently absurd for two reasons: 1. the bills apply only to existing (not future) mortgages, so it would be completely illogical for lenders to factor in a modification risk factor to new loans that would not be subject to modification; and 2. there is no evidence that lenders have ever factored in a modification risk for other type of loans. In fact, when judicial modification of farm loans was introduced, there was no effect whatsoever on farm mortgage rates.

They also claim that loan modification will require them to recognize mortgage losses on their books, which will devalue their stock. True, but is there something wrong with stock prices reflecting the true value of a company's assets? By the time homeowners end up in bankruptcy court - the only place where modification would be possible - the loss has already occurred: The only outcomes left are a foreclosure sale or modification.

Either way, the asset is going to be de-valued.

Finally, they claim - apparently in an effort to create divisiveness at a time when we all need to focus on the health of our economy - that this remedy is unfair to those who keep current on their mortgage payments and bought homes they could afford. Judicial modification will have no negative impact on current homeowners. To the contrary, it will prevent more homes becoming vacant in their neighborhoods, which will help keep home values up, and reduce the billions of dollars of bailout money taxpayers hand over to the lending industry in an effort to save homes.

And for those who claim that homeowners would flood into the bankruptcy court just to rewrite their mortgages, I can assure you that Chapter 13 bankruptcy is no walk in the park. It requires public disclosure of every aspect of your life, examinations under oath by a trustee and creditors, allowing creditors to haul you into court on any objection, and relinquishment of control of your financial life for up to five years, during which time you must live on a meager budget imposed by Congress.

The legislation has broad support and has been endorsed by leading economists, 22 state attorneys general, the U.S. Conference of Mayors, the National Association of Home Builders, AARP, the National Conference of Bankruptcy Judges, the Center for Responsible Lending and the National Education Association, to name just a few.

The mortgage lending industry had the opportunity to engage in honest, realistic mortgage modifications through the many programs that were set up last year, such as Hope Now. Yet study after study has revealed that these programs were ineffective because lenders were not cooperating. Allowing judicial modification of home loans by bankruptcy judges is the only proposal now on the table that: 1) is guaranteed to save homes from foreclosure; 2) will not cost taxpayers a single dollar; and 3) will provide lenders with at least as much value as they would get were the home to go to foreclosure. It's a sound solution to a difficult problem and we should all urge members of Congress to support it and enact these bills into law.

Stuart T. Ing is a Honolulu attorney specializing in bankruptcy. Others who contributed to this article are Barbara L. Franklin, Martin A. Berger and Sally Kimura; all are Hawaii members of the National Association of Consumer Bankruptcy Attorneys.