Cost to Borrowers of Bankruptcy Reform - $160/mo.
As legislators try to find a political solution to an economic problem - the mortgage market mess - a number of proposed “fixes” have been put on the table already. One piece of legislation popular with consumer advocates is the Emergency Home Ownership and Mortgage Equity Protection Act of 2007 (H.R. 3609). This bill was passed by the U.S. House of Representatives’ Committee on the Judiciary last December.
One reason for its popularity is that it contains a so-called “cram-down” provision. Boiled down, this provision would give bankruptcy judges the ability to unilaterally change the terms of a mortgage loan, including the amount owed on a loan. In other words, the judges could cram the losses down the throat of the lenders. In today’s climate, this “stick it to the man” approach seems to have great appeal.
In the words of the Mortgage Bankers Association, however, “this Bill throws into question the value of the collateral that backs every mortgage made in this country — the home itself.” To evidence just how misguided such a knee-jerk reaction is, the MBA crunched some numbers to see what the cost would be to borrowers and consumers in the marketplace if this law were enacted.
The results? Consumers nationwide would wind up paying an average of about $160 more per month on their mortgages. This means consumers would pay approximately $1,920 more per year. Areas with higher home prices would be hardest hit. How does an extra $331 per month sound for California? or $an extra $231 per month in Massachussetts?
In my own beloved Washington, DC, Maryland and Virginia, we would get to pay an extra $238 or so per month.
The reason is simple. It doesn’t take a PhD in economics to figure out. If the lender can’t count on the value of the collateral when it makes a mortgage loan, the lender has to price that loan higher. Thus, the cost to borrowers increases.
Ultimately, what happens is the people who pay their bills get hit with higher rates because some small portion of the population doesn’t pay its bills. Is this a sound pro-consumer approach? So why do certain consumer advocate groups like the Center for Responsible Lending try to “help” in this way? This is the last thing borrowers and homeowners need.
How is someone supposed to buy or sell a house if no one can afford a mortgage?!!
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[...] prior posting on Mortgage Law Blog has explained that the resulting costs of similar provisions would likely amount to an average of [...]