MBA Sees Huge Rate Increase Tied to Bankruptcy Cram Down

January 16, 2008 No Comments »

The Mortgage Banker’s Association is again arguing that the proposed legislation to allow bankruptcy judges to alter the terms of a mortgage loan will result in mortgages rates one and a half to two points higher.

On December 12th, 2007, the House Judiciary Committee passed HR 3609, the so-called “Emergency Home Ownership and Mortgage Equity Protection Act of 2007.”

The proposed legislation ends a 110-year old federal protection that prevents bankruptcy judges from altering the terms of mortgage loans tied to primary residences.

“If this proposal becomes law, it will amount to a new tax on homeowners, costing them hundreds of dollars more per month and thousands of dollars more per year,” said MBA Chairman-Elect David Kittle in a statement. “The last thing potential homeowners, and those looking to refinance into new loans, need in this market is higher mortgage payments.”

The MBA believes that such a law would make it more difficult for mortgage lenders to accurately appraise property, leading to higher down payment requirements, higher closing costs, and steeper interest rates to offset risk.

“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 help the few at the expense of increasing costs on every borrower seeking a new mortgage.”

The MBA has also launched the “Stop the Bankruptcy Cram Down Resource Center”, which provides state and county-level data explicitly indicating the potential costs to the average homeowner.

In California, assuming you hold a loan amount of $331,926 at a rate of 6% on a 30-year fixed mortgage, the new interest rate could be 7.5%, resulting in a monthly payment increase of $331, and an annual increase of $3,970.

Take a look at your state to see what the possible implications could be.

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