Sherrie Floyd says she was able to handle the first reset on the $505,000 mortgage she had taken out to refinance her Vallejo, Calif., home. And the second.
But this month, when the mortgage reset for the third time -- driving her monthly payment to more than $4,300 on a home worth about $470,000 -- she told the judge overseeing her and her husband’s bankruptcy case that they would have to abandon the place unless their lender agreed to modify their loan.
That doesn’t appear likely.
“We applied four times for a loan modification,” said Floyd, 44, who has a clerical job with the Kaiser Foundation. “They told me there was nothing they could think of that we could afford.”
The Floyds might have been helped by a congressional proposal to allow bankruptcy judges to approve modifications of home mortgages to stave off foreclosure. But that measure has been derailed amid fierce opposition from lenders, and even supporters concede that it is unlikely to win approval this year.
The Mortgage Bankers Assn., which spearheaded the Capitol Hill campaign, claimed that the bankruptcy measure would drive up the costs of all new residential mortgages by as much as 2 percentage points. That would be a major hit: A change from 6% to 8% on a $300,000 30-year fixed-rate mortgage would raise the payment by $402 a month, or nearly $5,000 a year.
But that claim has come under fire by critics who say the MBA cherry-picked data to paint a bleak picture of sharply higher mortgage rates. The association also misquoted a study by the nonpartisan Congressional Budget Office in a way that made it seem that the CBO supported its position against the bill.
In “talking points” posted on its website, the MBA cited a finding in January by the CBO that the consequence of the bankruptcy proposal “would be higher mortgage interest rates.”
In fact, the CBO analysis states that there “could be” higher rates, and qualifies that even further by noting that the size of any increase “is difficult to predict and could depend on the exact change in policy.”
The MBA removed the document with the misquotation from its website after it was questioned by The Times, and later posted a corrected version.
CBO Director Peter Orszag later told Rep. Brad Miller (D-N.C.), one of the bill’s sponsors, that amending the bill to restrict it to existing mortgages only -- a change that was subsequently made -- “would attenuate any possible effect on mortgage rates.”
A recent study by two academics, Adam Levitin of Georgetown Law School and Joshua Goodman of Columbia University, suggests that the MBA’s figures on interest rates inflated the threat.
The researchers found there was virtually no difference in rates quoted by a sample of leading mortgage lenders for single-family houses and vacation homes and multifamily dwellings -- even though mortgages on the latter two can be modified in bankruptcy.
The only consistent discrepancy they found was between the rates charged on single-family homes and investment properties. But investment properties, Levitin notes, contain other risks, including the greater likelihood that investors will walk away from properties whose values fall below their loan balances, that would explain the difference.
Levitin says the findings show that there’s no reason to think mortgage lenders would take the threat of bankruptcy into consideration when setting loan terms for primary residences. Lawmakers have also modified their proposal so that it would apply only to sub-prime and other risky mortgages issued from Jan. 1, 2000, to the date of enactment -- further limiting its effect on the overall market.
“I don’t know how much more narrowly you can draw the provision,” said Alan M. White, a bankruptcy specialist at Valparaiso University School of Law. “It’s really aimed at people who want to pay their mortgages.”
Francis Creighton of the MBA contends that even a limited change in bankruptcy law now would open the door to further modifications, undermining lenders’ confidence in the reliability of their loans and driving up rates to compensate.
That argument became one of the key talking points for opponents to the proposal.
“This will put up barriers -- maybe unintended barriers, but real barriers, the experts tell us -- to the American dream of owning a home,” Sen. Charles E. Grassley (R-Iowa) said this month during Senate debate on a housing stimulus package.
Mark S. Scarberry, a bankruptcy expert at Pepperdine Law School, said, “To allow a mortgage holder to force modification on a lender is a whole new wrinkle.”
Scarberry says the costs for lenders might be moderated if the proposals required the modified mortgage to be revalued after five years, and written up to a higher market price if the home has appreciated in that period. That way, he said, “the lender would have some upside.”
Sponsored by Sen. Richard J. Durbin (D-Ill.) and Rep. Miller, the bankruptcy measure has been the most contentious of the numerous proposals before Congress to address the nation’s housing slump and the credit crisis, which originated in a collapse in the market for sub-prime mortgage loans.
Critics contend that thus far congressional proposals for housing market relief tilt sharply in favor of aid to lenders, bankers and even unprofitable home builders. The latter would receive a multibillion-dollar tax break from a provision in the Senate bill allowing them to reclaim federal taxes paid during profitable years dating back to 2004.
The proposal before Congress would allow bankruptcy judges for the first time to modify single-family home mortgages when the appraised value of the home has fallen below the principal balance of the loan.
The excess principal would be declared an unsecured debt -- the category that typically receives the lowest payout in bankruptcy. The remaining balance could be modified by a judge’s order to give the homeowner a better chance of keeping up with payments, but the change would have to assure the lender of receiving the full present value of the remaining loan over time.
The proposal would apply to borrowers in Chapter 13, the bankruptcy provision for persons seeking to reorganize their personal debts. In most cases, Chapter 13 requires debtors to pay off their secured debts over three to five years; the proposals in Congress would grant an exception for modified mortgages, which could still extend well beyond that limit.
Although some lenders have offered to work out voluntary modifications with strapped borrowers, subject to strict conditions, “there are a lot of structural barriers to loan modifications, and a voluntary system doesn’t do enough to affect them,” said Kurt Eggert, a law professor at Chapman University who studies mortgage issues.
Shifting the authority to bankruptcy judges might encourage loan servicers to make modifications by giving each deal the imprimatur of a federal court.
Some supporters contend that the proposal rectifies a glaring inequality in bankruptcy law: Currently, judges can approve modifications on loans secured by “factories, grocery stores, farms, boats, motor vehicles, mobile homes and investment property,” as one bankruptcy judge supporting the change observed in a letter to Rep. Linda T. Sanchez (D-Lakewood), a cosponsor of Miller’s bill.
In other words, just about everything but a principal residence.
Floyd says she’s become well aware of that while waiting long hours in bankruptcy court for her case to be called.
“I’ve seen the judges change people’s car notes,” she said. “If they could just freeze my rate, I could pay my note.”