Can a new bankruptcy law fend off foreclosure?
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A couple of quickies this morning on what government might do to slow the tide of foreclosures:
The New York Times, which has been on the cutting edge of reporting and commentary about government bailout plans, awakens today to an important part of that story: Many, many Americans are strongly opposed to bailouts for struggling homeowners. ‘People struggle to buy homes in this city, for sure,” says Mark Ellerbrook, who manages a government homeownership program in Seattle. “And then you have what looks, on the face of it, like the city giving money to people who made bad decisions.”
The L.A. Times reports that Senate Democrats are pushing for changes in federal bankruptcy laws that would allow homeowners to renegotiate their mortages in hopes of keeping their houses: ‘The proposal, part of the Foreclosure Prevention Act embraced by leading Democratic lawmakers, would allow judges to ease the terms of mortgage loans during bankruptcy proceedings.’
The bankruptcy change raises a number of issues, and I’d like to hear your thoughts. Say a judge does in fact reduce your mortgage. Does that constitute a sale of the house, with reduced property taxes, and a new, cheap comp in your neighborhood? How does the judge decide what the house is worth -- only what you can pay?
Much more important: How many people facing foreclosure are likely to go into bankruptcy to get a new mortgage? And what is the likelihood that, if bankruptcy laws are changed, they will make timely payments on the new, reduced mortgage in the future?
I’m reminded of the words of mortgage broker and Fed watcher Lou Barnes, who wrote recently that attempts to prevent foreclosures are a waste of time. He doesn’t mince words: These are ‘weak financial households’ that purchased homes only because of disastrous underwriting. They can’t be saved.
Barnes: ‘The sad reality: The vast majority to suffer foreclosure today were weak financial households to begin with. ... The few households suffering temporary bad luck (job loss, health, divorce) deserve all the ‘workout’ help the system can provide. The inherently weak households will defy every effort. Even extraordinary re-writes will beget re-default, the poorly maintained house creating deeper loss in the ultimate foreclosure, the troubled inventory overhanging the marketplace and preventing recovery.’
Thoughts? Comments? E-mail story tips to peter.viles@latimes.com