Wednesday, July 29, 2009

Sometimes you must destroy an industry to save it

Barney Frank is channeling General Curtis LeMay. Frank says he will push legislation that will allow homeowners who have defaulted on mortgages to file for bankrupty reorganization.

What does that mean? It means homeowners will obtain some of the same relief corporations get when filing a Chapter 11 reorganization. The court restructures the debt, reducing both the principal amount owed and the interest rate to levels the corporation can manage. The bankruptcy court sees this as the fairest way to resolve some debt problems.

Homeowners who default do not have this option today. But Frank threatens to give it to them.

What would happen if homeowners were able to go to court and have the amount of their mortgages reduced? Only the most creditworthy borrowers would receive mortgages AND the price of houses would drop to reflect the sharply higher downpayments every lender would demand.

Of course that would kick the legs out from under the mortgage market and, by extension, the housing market. As a result Barney Frank and the Financial Services Committee would have to find ways to give taxpayer money to home-buyers to keep the housing market from shutting down.

Frank threatens banks to stop foreclosures

Jul 29, 2009

WASHINGTON (AP) - A senior House Democrat threatened banks Wednesday that if they don't volunteer to save more homeowners from foreclosure, Congress will make them.
In a sternly worded statement, Rep. Barney Frank said Congress will revive legislation that would let bankruptcy judges write down a person's monthly mortgage payment if the number of loan modifications remain low.

Frank, chairman of the House Financial Services Committee, also said his committee won't consider legislation to help banks lend unless there is a "significant increase" in mortgage modifications.

Frank's statement was aimed at adding momentum to a deal struck Tuesday between Treasury Secretary Timothy Geithner and more than two dozen mortgage companies. The two sides agreed to set the goal of adjusting 500,000 loans by Nov. 1.

But it was far from clear whether that would happen.

Loan servicers say they are still trying to play catch up to a deluge of customer requests by hiring and training thousands of new employees. Banks also are trying to sort through which customers face a legitimate financial hardship.

Also, many loans have been bundled and sold to investors as securities, complicating efforts to modify the terms.

Congress tried earlier this spring to pass legislation that would give people a chance to keep their homes by filing for bankruptcy. But while President Barack Obama said he supported the measure, he did little to see it through and it was defeated amid an aggressive lobbying effort by banks.

The measure failed in the Senate by a 45-51 vote, falling 15 votes short of the 60 needed to overcome procedural hurdles.

"People in the servicing industry and in the broader financial industry must understand that if this last effort to produce significant modifications fails, the argument for reviving the bankruptcy option will be extremely strong, and I think there is a substantial chance that the outcome will be different," Frank said.


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