Political Discussions
Will the Bankruptcy Bill End the Foreclosure Crisis?
Posted by TotalAttorneys • 1/27/09 • Subscribe to this Discussion [RSS] • Report This Topic
Topics: bankruptcy reform, mortgage foreclosure
IL Senator Durbin's bankruptcy reform bill--which would allow bankruptcy courts to modify home mortgage loans--seems closer to passage than ever with Citigroup jumping ship and becoming the first in the financial industry to endorse the measure. Durbin previously estimated that the bill would allow bankruptcy courts to directly assist about 1/3 of the approximately 8 million homeowners projected to face foreclosure over the next four years.
Might this be the beginning of the end, or have the Citi compromises taken the teeth out of the legislation?
blog.totalbankruptcy.com/archives/bankruptcy-and-the-economy-what-the-new-b...
User Comments
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No it won't.
It will deplete the asset value of the banks, completely unbalancing their risk ratio.-
How so, CSI? Those loans that are ending in foreclosure right now are depleting the assets of banks, in that they are ending up spending money to take back property that is often worth less than the outstanding debt, and then in many cases unable to resell. A recent newspaper article talked about how some banks are paying people to live in the homes they've foreclosed on, because they can't sell or rent them out and they are targets for vandalism if they sit empty. Do you honestly think that banks would be worse off if they were getting regular payments on those loans, albeit at a lower interest rate than they'd anticipated?
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When the bank made the loan, they did so with the calculation of the principle and the interest to be enough to provide both a buffer for the loans that default as well as providing a profit.
When you remove part of that buffer, you are unbalancing the market.
Also, by keeping these owners in the house, you are protecting the house value that it was sold for. Which in most cases means that you are protecting a speculative value that should be going down with the rest of the market.
The decline in purchase power, and increased difficulty getting loans should decrease property values. Which will happen when banks are stuck with large inventories of property. (it hasn't fully started yet because of the bailout, / Stimulus, but it will soon enough)
So now you are in a recession, which will affect the market differently because some areas (renegotiated properties) will be kept at inflated values while disposable income will be lower. Putting the freeze on this will slow down the recovery of the economy.
Yes, the banks will take a hit of the property, but they will free larger amounts immediately when they unload these properties at a market adjusted, deflated price.-
I agree with a lot of what you're saying. Houses right now are way overpriced because of all the speculation that created the housing bubble. Prices need to settle back down to where they should be. Here's a graph of median housing prices:
If the bubble never occurred, median housing prices would be between $150,000 and $175,000 right now. If the government props up the market, it won't be at the equilibrium price and while it may ease the pain for a little while, it won't last. -
Sati, that makes sense, but how does reducing principal balances to coincide with current market value and rewriting loans "prop up the market"? Or do you think we need those 8.1 million foreclosures to get back to a more realistic price? -
Well, if you make it possible for people to stay in their overpriced houses, then the values will remain higher than if you let market conditions control prices. For those people who bought in the past five or so years, there's going to be a lot of pain. Even if they're able to stay in their homes, when it's worth less than what they owe, that's got to hurt.
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This is a speculative price, Just like any other investment, when there is an overspeculation you end up with inflated prices, and just like any other speculation, that has to be allowed to re-adjust itself when it has reached outside what levels can be supported by actual value.
If not, you end up trying to balace a very delicate equilibrium by working on one side of the see-saw. Which doesn't work for long.
For once, Sati and I are in agreement, there will be pain for those that got into this market in the last 5 years. But it will improve the upward mobility of the country as a whole once the economy settles back down into an upward slope.-
What kind of impact do you think those millions of new homeless people will have on the economy? This isn't a challenge, but a serious question. I can see the point you're both making, but what about the flipside? If there are really 8 million homes going into foreclosure in the next four years, and the vast majority of those homeowners are upside down on their mortgages, they're walking away with nothing but debt--which means not only that they're not contributing to the economy, but likely a huge upsurge in bankruptcies, which will impact non-mortgage lenders as well.
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Well, for starters, they won't be homeless, they will be renters.
If they can't afford to pay rent, they won't be able to pay the reduced mortgage either. So they will be homeless regardless. -
Being able to pay rent and being able to find a place to rent are two different things. Rental properties are already in short supply in some areas because of the combination of foreclosures and the fact that many people have determined that it's a bad time to buy real property. In addition, most rental companies do credit checks to screen out applicants--since the rental business is booming, they'll have no incentive to lower their standards, and people with foreclosures, deficiency judgments and possibly bankruptcies aren't going to be especially appealing tenants.
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and what do you think will happen with the properties that banks can't unload?
There are plenty of management compaies that are managing houses in bank ownership for rental. And more are springing out of the ground.
These houses and condos will go on to the renters market. And as prices go down, more people in good standing in rentals today will have upward mobility, which will open up more rentals.
There isn't a housing shortage, and the market will adjust to what is the most beneficial if we let it.-
Do you honestly think that those rental companies are going to turn around and rent to the same people they just tossed out for non-payment, when those people now have judgments and possibly wage garnishments thrown into the mix?
It's interesting the difference the crowd makes; this story has 136 Diggs right now and there hasn't been one comment along these lines. I wish you guys were over there. -
Does it have to be the SAME person they rent to? The top properties will go to the best renters, and those with the worst financial status will have the bottom end of the renters market. Like it should be.
When the market of rentals increase, the price will begin to drop, and after a while. You'll see that people who are today renting a 2br apt, might be renting a 2br house for the same money.
This will in fact be beneficial to everybody, as prices for housing drops, the price of renting will too.
Protect the housing market, and you'll end up with a declining purchasing power, but no easing of the renting cost, and you'll have housing consume more and more of the available cash. -
One thing Erik - the banks aren't going to lower the cost to rent the house that foreclosed simply because there's a lot on he market.
They will rent the house for the appropriate mortgage payment so they can maintain their profit.
That is exactly what is occurring here, even with empty homes and bank owned properties sitting empty, they refuse to lower their prices.
As rentals become the next big thing, the prices increase accordingly. -
At present yes, you are correct, But you are insane if you think that the banks won't lower the cost of this to mitigate losses.
You have to remember that the banks are responsible for things like property tax etc. while they are sitting on the property, this means that short term, they'll hold it as high as possible. But as the market floods with more and more properties, this will change.
Even the greediest bank knows the difference between making as much as they would like, and not loosing money hand over fist.
The median rent price will meet the median renters available income before long.
and prices won't go up if there is an abundance, which there is on the renters market. Look in your local paper, are there "for rent" ads in your area. As long as there is a constant supply over demand, this will remain the same.
However, there is another aspect of this that could make the balance tip. That is the propensity for bad family economics to cause divorce and separation. If that happens to a larger extent, then each emptied housing uniit will fill two new ones. That, in conjunction with a basic moratorium on new construction as the population increases could drive renting prices up faster than buying.
Which will create a situation where more renters will choose the option of buying again. Also not a bad thing in the long run. -
You may be right, but right now I'm not seeing that at all.
For example - we have an enormous list of houses for sale, or in foreclosure. Many of the homes for sale are actually empty - the seller attempted to sell the house before the fallout, and had already purchased or moved elsewhere.
In that case the owners are renting for the mortgage amount, and they are not budging, or else they will foreclose.
The bank owned properties right now are for sale or for rent. I've been keeping a very close eye on this market - which is flooded at the moment - and it's cheaper to buy the house than it is to rent it. The banks are willing to take a loss, but only in the form of a purchase. If they must rent it, they are renting for the price of the original mortgage payment.
I have yet to see a price go down yet. And theoretically, they should.
But here's the kicker - the inflated rentals are being filled in slowly. People need a place to live, the prices are all about the same, and so they're being strong armed into it. Unless they can get a mortgage and buy one of these places, they either rent for this price, or move (way) out of town which isn't feasible for most people. Out of the region, actually.
That's why we can't get out of here, where we rent. We're absolutely stuck.
Now eventually - a long time down the road the prices should eventually come down. the high rent and mortgage prices are killing us here, and soon everyone will either be evicted, foreclosed, or homeless. So obviously something will have to change.
in the meantime the banks - and landlords - are milking this for all it's worth. -
And bailing out the banks gives them capital to stuff in that hole so that they can hold out longer. WHich doesn't help you or anyone else. And won't have done a bit of good when that money runs out.
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We agree on that point.
Rat bastards
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Are you sure you don't mean asshats?
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