Mortgage Rate News

With foreclosures likely to increase in the coming year to two years, many in government are trying to grapple with the problem. One solution is a bill that has recently gone to committee in the House.

The bill, HR 3609, would allow bankruptcy judges the ability to alter the repayment terms of mortgage loans. This could only happen in Chapter 13 bankruptcy, but some economists think that it is a good idea. Inman News reports:

Mark Zandi, chief economist for Moody’s Economy.com, testified in support of the bill, saying lenders have been slow to modify the loan terms of troubled borrowers. Giving bankruptcy judges such powers would “significantly reduce the number of foreclosures” and reduce the likelihood of a recession, Zandi said.

Judges would be able force lenders to switch from adjustable rates to fixed rates, and even reamortize the mortgage loan debt. Additionally, there would be provisions so that the borrower could repay the mortgage loan beyond the current limit to such plans (five years).

Not everyone thinks this is a good idea, though. Inman reports that the Mortgage Banks Association is against it:

“To explain this in terms of pure interest rate … we estimate that borrowers would see a (2 percent) jump in interest rates with a 5 to 10 percent down payment … with no points or fees at closing,” [MBA chairman-elect David] Kittle said.

However, many economists dismiss this claim. They insist that better lending practices would be adopted because of the bill, and they also point out that the costs of mortgage credit would be unlikely to rise so dramatically, since foreclosure would cost more to mortgage lenders than would even adjusted terms through bankruptcy.

Bankruptcy judges can already adjust repayment terms for credit cards and other consumer debt. Would it make sense to finally include mortgage loans in the mix? Some say it would, by forcing mortgage lenders to make the changes they should have made years ago to help prevent foreclosures.