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May 6th, 2009

Will Loan Mods Eventually Be Mandatory?



House Speaker Nancy Pelosi gave a “strong indication” today that the House will not attempt to put the mortgage cramdown provision — which was rejected by the Senate last week — back into a housing bill that’s working its way through Capitol Hill, saying:

“It’s clear that the votes are not there in the Senate.”

Yet at least one group thinks Pelosi’s “indication” will be temporary. In light of the staggering failure of every (voluntary) loan modification program to date, one research group said that support for mortgage cramdowns — a law that would allow bankruptcy judges to reduce the principal amount of an outstanding mortgage — could come back “with a vengeance”:

“If modifications don’t pick up, I think mortgage bankruptcy returns with a vengeance,” said Jaret Seiberg, a policy analyst with Washington Research Group. “Bankruptcy is the tool that the government can use to modify contract terms without incurring liability. If we enter the fall, and we’ve helped hundreds of people rather than tens of thousands, there’s going to be tremendous pressure to pass full-scale mortgage bankruptcy. So there’s a lot riding on the implementation of the mortgage modification plan.”

Research has shown that recently modified loans have a re-default rate of around 50%. Experts like Mark Zandi of Moody’s Economy.com say the modification initiatives haven’t done enough to significantly reduce a borrower’s monthly payment or overall balance.

Unless lawmakers can find a way to either create a workable loan mod strategy, or tweak an existing one, analysts like Jaret Seiberg feel the argument for the “dreaded” cramdown may never go away.

Pelosi’s “indication” today was taken with a sigh of relief from mortgage insiders who fear that “if passed, [mortgage cramdowns] would likely lead to rising losses for home equity and credit card lenders, while also reducing housing affordability…”

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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