RISMEDIA, Jan. 15, 2008-A proposed change in the bankruptcy law that would allow courts to write down the value of home mortgages in the event of bankruptcy by the borrower would have cost home buyers in Connecticut more than $2,636 if it had been law in 2006, according to the Mortgage Bankers Association.
“If this proposal becomes law, it will amount to a new tax on Connecticut homeowners, costing them hundreds of dollars more per month and totaling thousands of dollars more per year,” said MBA Chairman-Elect David Kittle. “The last thing homeowners need in this market is higher mortgage payments.”
The House Judiciary Committee passed HR 3609, the Emergency Home Ownership and Mortgage Equity Protection Act of 2007 on December 12th, 2007. The legislation would end a 110-year old federal protection that prevents bankruptcy judges from altering the mortgage terms of loans on primary residences. The protection was specifically affirmed by Congress in the 1978 re-write of bankruptcy law as well as in a 1993 Supreme Court decision.
If bankruptcy judges are allowed to unilaterally change the terms of a signed mortgage contract, lenders will face new uncertainty as to the value of the asset – the home – that is to serve as collateral for the loan. To account for the new risk that this bill imposes, lenders will be forced to require higher down payments, higher costs at closing and higher interest rates. Holding all else constant, MBA believes that this will increase interest rates on all future mortgages by one and a half to two percentage points.
On average MBA expects mortgage interest rates to go up at least one and a half percent if this bill passes. In 2006, Connecticut borrowers took out 142,832 mortgages for a total of $31,486,039,000. An increase of one and a half percent on their interest rate would have increased the amount paid by these borrowers by at least $2,636 in 2006.” A borrower in Connecticut who was either refinancing an existing loan or taking out a new loan for the average state loan amount of $220,441 for a 30 year fixed rate mortgage, would pay an extra $219 per month, totaling 2,636 more per year with this rate jump.
“Congress is, quite laudably, attempting to help consumers who face difficulties paying their mortgages,” Kittle said. “But this law will, ironically, create future difficulties by increasing mortgage costs. To help consumers, Congress should finish work on modernizing the FHA and pass a predatory lending bill that provides uniform protections for all consumers. Congress should not change the bankruptcy laws to increase costs on every new mortgage.”
For more specific state, including how HR 3609 would impact mortgage payments on a county by county basis, visit www.mortgagebankers.org/stopthecramdown
