The Courts and Mortgages.

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The proposed solution to fix the housing finance sector would be worse than the problem. Hundreds of years ago, banks and insurance companies went belly-up fairly often.

Working with bigger numbers, today's actuaries can give bankers a far more precise estimate of how many borrowers will default. Rates are then set to show a competitive profit despite that anticipated failure rate.

But what if a new factor were inserted in the equation? Instead of courts and judges working as neutral referees in the enforcement of those written loan contracts, what if judges presiding over bankruptcy cases were suddenly empowered to play Santa Claus? What if judges had the power to adjust interest rates, payback periods -- even to declare the amount owed the lender is less than the amount actually loaned?

This would throw all those carefully tabulated reams of actuarial data into a cocked hat. How the heck does a lender now figure his real risk of loss?

One thing is for sure -- just to be on the safe side, lenders would have to demand higher down payments and higher monthly installments, covering themselves against the new uncertainties of a court system where Vanna White might just as well spin a wheel to figure out how much the lender gets.

In Washington, Congress now contemplates the Emergency Home Ownership and Mortgage Protection Act. Provisions of that bill would allow judges presiding over bankruptcy cases to alter homeowners' mortgage terms, including interest rates, payback periods and principle balances.

Mortgages would no longer be viewed as contracts. More like a "list of suggestions."

The Mortgage Bankers Association sat down to estimate how this version of "Wheel of Fortune" would impact new mortgage loans.

The results? The mortgage bankers estimate that the new uncertainties introduced into the market by this bill would require boosting interest rates on future mortgages by 1.5 percentage points. That would mean an increase of $217 per month on the average Clark County home loan of $217,541.

The bankers, of course, have a vested interest in opposing such a breakdown of the old rule that courts are supposed to enforce written contracts. Local real estate attorneys argue the bankers are exaggerating.

Maybe. But there's no doubt the law is intended to allow judges to play Tooth Fairy to those who unwisely entered into mortgage deals they can't afford -- and that banks required to make up those losses elsewhere will inevitably have to charge the difference to good customers who pay their bills.

Yes, federal laws prohibit lenders from "overcharging" borrowers to cover such added risks. But -- leaving aside the wisdom of that degree of micro-management, in the first place -- those regulations are triggered when loan rates go up by 3 to 4 percentage points. The bankers' estimate of a 1.5-point pass-along would be legal.

Congress should avoid this feel-good Band-Aid. The best way to shorten the period of pain is to let the home market correct itself. At that point, hardworking Americans who have been saving for a down payment will find more homes on the market at lower prices -- and banks who want to loan them money will know the courts can still be depended upon to enforce those contracts.

The congressmen don't seem to have enough money in their own checking accounts to pay off all the mortgages now threatening to default. They should just admit that -- instead of reaching into ours.

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Date published: Jan 24, 2008

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