What Biden said about bankruptcy judges

[scruffypup]

Last night he stated that bankruptcy judges should have the power to determine interest rates, but also the principal on mortgages. That seems a little scary to me. I would think the majority of homeowners less than half way through mortgages would declare bankruptcy to get their principal lowered. Those that shouldn't be in homes in the first place would get a big free pass to a low price on a home. The lenders would get the shaft, not be helped.

 

[Juddog]

Originally posted by: scruffypup
Last night he stated that bankruptcy judges should have the power to determine interest rates, but also the principal on mortgages. That seems a little scary to me. I would think the majority of homeowners less than half way through mortgages would declare bankruptcy to get their principal lowered. Those that shouldn't be in homes in the first place would get a big free pass to a low price on a home. The lenders would get the shaft, not be helped.

The reason why they brought that up is that some people refinanced with variable interest rate mortgages, thinking they would get a deal, then all of a sudden are paying twice their prior payments because the interest rate got jacked for no reason. A lot of these foreclosure cases could be dropped if the interest rate was dropped back down to a reasonable level, and if that happens, the house continues to get paid on, the bank continues to get it's money, and the home owner continues to keep his house.

Nobody is going to declare bankruptcy simply to get a lower APR rate on their mortgage - that type of thinking is flat out ridiculous.

 

[jonks]

Originally posted by: scruffypup
Last night he stated that bankruptcy judges should have the power to determine interest rates, but also the principal on mortgages. That seems a little scary to me. I would think the majority of homeowners less than half way through mortgages would declare bankruptcy to get their principal lowered. Those that shouldn't be in homes in the first place would get a big free pass to a low price on a home. The lenders would get the shaft, not be helped.

Really? The "majority of homeowners" would destroy their credit for the rest of their lives by declaring bankruptcy in a hail-mary pass to get the principle lowered by appealing to a judge and praying to god he doesn't look at their income, assets and debts before they declared bankruptcy? The judge would have THE POWER to adjust principles, not a mandate that he do so.

I don't even know that I agree with granting them the power Biden describes, I'd have to read up on it more, but your hypothetical worries are not just unfounded, they are nuts.

 

[brencat]

Originally posted by: Juddog

Originally posted by: scruffypup
Last night he stated that bankruptcy judges should have the power to determine interest rates, but also the principal on mortgages. That seems a little scary to me. I would think the majority of homeowners less than half way through mortgages would declare bankruptcy to get their principal lowered. Those that shouldn't be in homes in the first place would get a big free pass to a low price on a home. The lenders would get the shaft, not be helped.

The reason why they brought that up is that some people refinanced with variable interest rate mortgages, thinking they would get a deal, then all of a sudden are paying twice their prior payments because the interest rate got jacked for no reason. A lot of these foreclosure cases could be dropped if the interest rate was dropped back down to a reasonable level, and if that happens, the house continues to get paid on, the bank continues to get it's money, and the home owner continues to keep his house.

Nobody is going to declare bankruptcy simply to get a lower APR rate on their mortgage - that type of thinking is flat out ridiculous.

So the lender should suffer because people were stupid? Sorry, that's not right. Investors buy these packaged mortgages and estimate their return based on some expected average interest rate over the security's expected life. You lower that rate and it throws the investment appeal straight out the window, making risk analysis on a portfolio of these types of mortgages much more difficult. As a result, investors won't buy them and rates will go up for potential homebuyers big time as the market begins to price in gov't interference.

 

[Craig234]

The logic makes some sense - the idea that 'bottom up' help makes more sense than 'top down', i.e. giving the help to the homeowners is better than to the Wall Street firms who got in trouble for their excesses in buying the various high risk bundling of the sub-prime mortgages and other practices.

I'm not sure I'm in favor of it, but it's not like people can just get the money by not paying their mortgage. It'd be in bankruptcy court with a judge determining what they can pay.

I'd like to hear from some independant experts on the best approach, not let the CEO of Goldman Sachs - who has so far let a competitor of Goldman Sachs go under while bailing out AIG for $75 billion in loans while the current CEO sat in his office, and it's reported that AIG going under would cost GS $20 billion - hand out the cash as he leaves office.

 

[Lemon law]

Desperate times call for desperate measures, Biden and Juddog have a point. The alternate is what could amount to a possible 2 to 3 trillion dollar bail out, with totally innocent taxpayers stuck with the tab. Where does this crapola come from, this notion that no plan is possible if even one single miscreant benefits. Right now, its should be about finding some rational way of cutting our losses.

 

[Juddog]

Originally posted by: brencat

Originally posted by: Juddog

Originally posted by: scruffypup
Last night he stated that bankruptcy judges should have the power to determine interest rates, but also the principal on mortgages. That seems a little scary to me. I would think the majority of homeowners less than half way through mortgages would declare bankruptcy to get their principal lowered. Those that shouldn't be in homes in the first place would get a big free pass to a low price on a home. The lenders would get the shaft, not be helped.

The reason why they brought that up is that some people refinanced with variable interest rate mortgages, thinking they would get a deal, then all of a sudden are paying twice their prior payments because the interest rate got jacked for no reason. A lot of these foreclosure cases could be dropped if the interest rate was dropped back down to a reasonable level, and if that happens, the house continues to get paid on, the bank continues to get it's money, and the home owner continues to keep his house.

Nobody is going to declare bankruptcy simply to get a lower APR rate on their mortgage - that type of thinking is flat out ridiculous.

So the lender should suffer because people were stupid? Sorry, that's not right. Investors buy these packaged mortgages and estimate their return based on some expected average interest rate over the security's expected life. You lower that rate and it throws the investment appeal straight out the window, making risk analysis on a portfolio of these types of mortgages much more difficult. As a result, investors won't buy them and rates will go up for potential homebuyers big time as the market begins to price in gov't interference.

Ok tell me what hurts the lender more - a reduced APR, or losing the entire value of property, which they may or may not be able to recoup on the open market?

 

[Vic]

Lenders are already doing this voluntarily on a large scale, so non-issue here.

 

[jpeyton]

Two options here:

1) Let bankrupt homeowners stay in their homes and renegotiate their mortgages to market value with a judge...they will continue making payments to banks.

2) Foreclose the property, drive down surrounding property values, have the banks write off the mortgage as a loss, and sell the property at depressed values anyway (since home values are dropping regardless).

 

[scruffypup]

I can understand the interest rate point (though I don't necessarily agree with it), but he said the principal should also be subject to change,... that is where I have a real problem, as well as causing many to try to get a lower principal and declare bankruptcy (if the situation is right mind you - I did exagerate a bit in OP) just to get a free pass. It is like buying a car for a certain price, signing a deal, then having the ability to go to court and say "I really don't think I should pay the $30K on this car,... let's settle for $15k at a lower interest rate"

 

[Vic]

Originally posted by: scruffypup
I can understand the interest rate point (though I don't necessarily agree with it), but he said the principal should also be subject to change,... that is where I have a real problem, as well as causing many to try to get a lower principal and declare bankruptcy (if the situation is right mind you - I did exagerate a bit in OP) just to get a free pass. It is like buying a car for a certain price, signing a deal, then having the ability to go to court and say "I really don't think I should pay the $30K on this car,... let's settle for $15k at a lower interest rate"

Like I said, lenders are already doing this voluntarily, so non-issue. They've even coined a name for it, loan workouts, and it's probably the only growth field in the mortgage biz right now.

Plus, in the situations like you describe in the OP, BK judges hear arguments from the lenders and base their final decisions largely upon their recommendations.

No offense, but you clearly don't understand how the bankruptcy process works. A person can't just say, oh I don't want to pay my bills so I'll declare bankruptcy, and hey, maybe I'll owe less on my mortgage too! It doesn't work that way. They have to file a case with the court and get their petition for bankruptcy approved, and all their creditors are allowed to contest the filing, with the burden upon the petitioner to prove that they are indeed bankrupt and incapable of paying their obligations. And here's a kicker, even if the filing is dismissed by the judge (meaning the judge decides they are capable of paying their debts), the petitioner's credit is still ruined by the filing itself (edit: it will appear on the credit report as Bankruptcy - Dismissed and weighs just as heavily as any bankruptcy would).
So this isn't something people take lightly.
Plus, bankruptcy judges have always had this power to one extent or another. Generally though, even in cases where the lender does settle for a lower principal amount, the original amount owed remains on the title to the property. So even if the borrower does end up selling the house down the road for a profit, the lender will still have a claim on any of the proceeds up to the original amount owed plus back interest. So keeping the person in the home is in the lender's best interests.

In other words, non-issue.

 

[Thump553]

He was talking in a very shorthand manner (because of the time limitations, I suppose). Basically the bankruptcy court cannot modify a contract, per se-that would be an unconstitutional taking of property. What the court could do (if the law was changed) would be to allocate the mortgage debt into secured and unsecured, and the unsecured portion would be discharged.

An example: $200k mortgage, house currently appraised at $150k. Under current bankruptcy law (thanks to the bogus "reform" act a few years ago) the debtor has a choice-reaffirm the entire $200k or abandon the house. Under the suggested change, the debtor could reaffirm $150k of the loan at the original interest rate, the rest of the debt would be wiped out. This is commonly called a cramdown.

This actually used to be fairly common before the bankruptcy "reform" by doing a chapter 20 (chapter 7 bankruptcy to wipe out the personal liability followed by a chapter 13 to reaffirm the crammed down debt). These were outlawed in the bankruptcy "reform"-which was essentially written by lenders and passed due to their massive campaign contributions (they bought members of both parties).

Right now lenders drive an overly hard bargain because they know they can't be crammed down. It's time to level the playing field.

 

[fskimospy]

Originally posted by: brencat

Originally posted by: Juddog

The reason why they brought that up is that some people refinanced with variable interest rate mortgages, thinking they would get a deal, then all of a sudden are paying twice their prior payments because the interest rate got jacked for no reason. A lot of these foreclosure cases could be dropped if the interest rate was dropped back down to a reasonable level, and if that happens, the house continues to get paid on, the bank continues to get it's money, and the home owner continues to keep his house.

Nobody is going to declare bankruptcy simply to get a lower APR rate on their mortgage - that type of thinking is flat out ridiculous.

So the lender should suffer because people were stupid? Sorry, that's not right. Investors buy these packaged mortgages and estimate their return based on some expected average interest rate over the security's expected life. You lower that rate and it throws the investment appeal straight out the window, making risk analysis on a portfolio of these types of mortgages much more difficult. As a result, investors won't buy them and rates will go up for potential homebuyers big time as the market begins to price in gov't interference.

The lender should suffer because the lender was stupid too.

 

[piasabird]

Well I could see a scenario where the government could pay off the mortgage and the then resell the house to the person at a fixed rate. Or if the loan was made through deceptive practices it could be declared and invalid contract. I dont want to make excuses because I am paying my house loan. I started with a loan with a 12% interest rate, and then I refinanced down to about 6% or so. There is no reason for these people to have to keep holding onto an ARM if the loan can be rewritten with the Govt as the cosigner if the people stand a good chance at paying off the loan. However, if they just cant afford any kind of loan, then they should be evicted. You cant just give every homeowner in California a free ride. There is a difference between help and a free ride at our expense.

The point is if the Govt can recoup part of their investment and the person can stay in their house then that may be a good deal. I have seen HUD agreements where HUD pays a percentage of rent and the tenent pays a percentage. This way both parties benefit. It can be a tough call. If you have a bunch of empty homes then you just stand a good chance of vandals breaking in and setting them on fire or something like that.