three of these measures.
Durbin's national press secretary, Max Gleischman, says the senator sought independent analysis on his proposal from two sources, Credit Suisse and Georgetown University. "Any claims that our bill would raise interest rates are completely false," said Gleischman.
But Chris Scheer, senior loan officer at Cornerstone Mortgage Inc. in St. Louis, says allowing a layer of subjectivity into the process - judges' varying opinions and rulings - will make it very difficult for the mortgage bond's value on the secondary market.
"The people who are on the secondary market who buy these bonds now risk losing principal," said Scheer. "It's catastrophic. This puts us back prior to the government stepping in and taking over Fannie Mae and Freddie Mac. The government didn't know what the value was, due to the uncertainty of their being paid. If the bankruptcy judges do have the ability to do the mortgage cramdowns, it's going to wreak havoc with the mortgage bonds...and interest rates do have the chance of going up," he added.
Al Suguitan, chief operating officer at the Greater Gateway Association of Realtors - an organization that includes realtor members from Madison County, portions of St. Clair and Monroe counties and more - says he's not surprised that lenders, realtors, bankers and others are alarmed by the new powers vested in bankruptcy judges.
"Lenders have every right to scream about this," Suguitan said. "If every mortgage that is written by a mortgage company has the possibility of being rewritten by the judge in less favorable terms - say 10 percent - the mortgage contracts of the remaining mortgages - 90 percent, in this example - willhave to be higher to subsidize the others that were reset. I think this is a wrong-headed approach that is dangerous. It will hurt the finance industry and future buyers even more." Suguitan says he's not sure whether bankruptcy judges are keen on the new process either. "The judge becomes the ombudsman in this new system," he said.
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"Just because the bankruptcy judge has the right to do it (reset the terms) doesn't mean that he will," said Scheer. "As with any circumstance in which someone appears before a judge, the ruling is unpredictable. In this case, the judge could opt for the cramdown, or he could see that someone refinanced their house four times over the past five years and decide not to reset the mortgage terms."
It's this uncertainty that will keep interest rates from getting down to where they should be, Scheer says. Add to this the devaluation of the U.S. dollar with all the recent buy-outs, he adds, and in the long run it's a recipe for inflation.
"We've created a huge opportunity for inflation," Scheer said. "Interest rates are going to have to go up because of the dollar's devaluation through all these buy-outs. As other markets start to solidify, U.S. investors are going to flee."
David Kittle, chairman of the Mortgage Bankers Association, says permitting bankruptcy judges to unilaterally modify mortgage loans on primary residences will restrict credit and increase the costs for all borrowers going forward.
"We all want to help consumers by stabilizing the market and helping families stay in their homes," said Kittle, "but we should be working on efforts to keep people out of the bankruptcy courts rather than pushing people toward them."
Because bankruptcy remains on an individual's credit report for seven to 10 years, Kittle says, it makes it really difficult to acquire future credit to buy or even rent another home. "Two-thirds of those who file for bankruptcy are unable to fulfill the terms of their repayment plans," he said. "Cramdown legislation also adds new risks to the calculation lenders make in setting prices. Lenders will be forced to demand larger downpayments and raise interest rates to balance the risk from judges who can now change the mortgage contract and cause lenders or investors to suffer an economic loss."
president/ceo: Kerry L. Smith
email: ksmith@ibjonline.com |
