Biden says “Let the bankruptcy courts lower your mortgage principal”
I’m sitting here watching the VP debates and just heard Biden talk about how he wants the bankruptcy courts to be able to reduce your interest rate so you can afford to stay in your home. Ok, I guess I’m not totally against that, although I don’t think that should be the court’s decision. Instead, the court might mandate that the bank provide options to rework your payment schedule, interest rate or other attributes of your mortgage so you can afford it and the bank doesn’t have to deal with the foreclosure.
But what really got me, and I haven’t looked this up to find out the details of the plan, is that Biden also said he wants the bankruptcy courts to be able to lower your mortgage principle. Maybe I misunderstood the statement, but based on his words tonight, I take it that he wants the courts to be able to cut off chunks of principal off your mortgage.
Where would it go? How is this different than me, as a store owner, selling you a shirt on credit and you calling in a partial chargeback because you have other financial obligations. As a merchant, bank or any other business entity, why would I want to do business with you if I can lose money on my sale at any time, seemingly on a whim?
Maybe I’ll give him the benefit of the doubt and assume he meant that the court should be able to renegotiate your loan terms, not actually “forgive debt”. I can’t imagine any bill would go through that would allow the government to decide how much you owe on a mortgage, unless the sale price was inflated through fraud.
Can any of you clarify his statement with a link to their platform where it’s clarified? Your thoughts otherwise?
Nope…the terms of the bailout package would give judges the power to change the amount you owe on your loan.
Really unfair. 2 people buy the same house for the same amount. One gets a 30 yr fixed, the other a 3/1 arm. The guy with the 3/1 arm gets a discount after the fact, but the guy with the 30 year fixed pays for it through higher taxes…GREAT PLAN!
You heard him right. Barney Frank, Chairman of the House Financial Service Committee has proposed that idea for almost a year after countless house hearings with Banks, Mortgage Brokers, and Loan Servicers:
http://www.house.gov/apps/list/hearing/financialsvcs_dem/ht120607.shtml
http://blogs.wsj.com/economics/2008/05/05/subtle-ben-bernanke-inches-closer-to-barney-frank/
I’ve listened to at least a half dozen of these hearings. Foreclosures are clustering in hot spots, they drag your house value (and mine in Northern Virginia) down. Whether they bought too much house, didn’t read their loan paperwork thoroughly before they signed it, or were speculators and over leveraged, those bad mortgages are out there, and we have to deal with them.
Perhaps if we had a year ago, we wouldn’t want to throw $700 billion in bad money after the $1 trillion worse in worthless liquidity we injected into the economy since then.
Bad loans destabilize mortgage backed securities, credit dries up (also, because credit-default-swaps were’t covered because the insurer’s money dried up). Pow. Stuttering Paulson and Benny B. are in front of Barney Frank discussing this “grave situation”.
…
I have a single friend, mid-30s, bought a nice older place in Kensington, MD between two Metro stops. Now, he probably bought a little too much house, but he made a lot of money, and his job was very stable. He paid $550,00 (and put 20% down) when he bought in Oct 2004, but for credit reasons his mortgage wasn’t ideal. In June of 2006, his credit cleared up and he decided to refinance. A computer — not a human who had been inside his house — appraised his place for $675,000. He took out some money to pay off a couple bills and do some work on his house, and refi’ed for $600,000.
He got sick in July 2007 and took a 6 month leave of absence from work (but had plenty of savings to pay all his bills). When he’s ready to go back, he ends up having two emergency surgeries, spends two weeks in the hospital, and another three months out of work. With his savings, he didn’t plan to be out of work sick for a year and paying $2,000/month to COBRA his health insurance.
He tried to do a workout on his mortgage — just defer 2 or 3 payments from now to the end of the loan (this is before Hope Now, one of Barney Frank’s pet programs), and both servicers for his mortgages told him to get bent.
He looked at refinancing, but his loan to value was now well over 100%. He ended up having to file bankruptcy and lost his house. He had to take a mandatory credit counseling class, where he was told, “Sir, do you know that your credit score is 750, and every line of credit you have is paid on time and never been late?” The same computer who never stepped inside his house appraised it for $380,000.
That, and the Mortgage Debt Forgiveness Act created the worst moral hazard in history:
http://www.credittrauma.com/category/short-sales/
Crisis of confidence in the markets is exacerbated by mortgage backed securities — portfolios of mortgages securitized — when there is no incentive for people to stay in their house. When they owe more than 100%, when their mortgage is more than the cost of rent, when they get sick and lose their job, their home is no longer the American dream.
Markets snap like a rubber band when they contract.
The thinking behind Biden’s plan—not that I’m for or against it—is that the people who are going into bankruptcy are generally those who were given mortgages that banks should not have, in good conscience, given them in the first place. While some people argue that even the most evil of banks disclosed that these people would be paying through the roof once their loan rates adjusted, others (myself included) argue that people are generally dumb.
The other issue is that there’s probably going to be a large movement in the next few years to simply abandon houses that are losing a lot of their value. That will simply make houses drop in value even more, convincing yet more people to abandon their houses, and so on. Reducing interest rates may not be enough to convince a lot of folks to stay in houses that are worth 30% less today than they were when they bought them a few years ago.
All that said, if I hear that my mortgage holder so much as cuts one dollar off one of their borrower’s principle, I’ll be demanding the same treatment, maybe even going as far as to stop paying them until they’re willing to deal. And I don’t really need to worry about my credit rating plummeting because, after all, we’ll be in a “credit crunch” for the next 10 years so I won’t be needing that credit anyway.
Sure, it is unfair. But I think that this may be one of those situations where fairness might need to take a back seat to doing what is best for everybody.
The talk of “keeping people in their homes” is nonsense, of course: If you owe more on a house than it is worth and you cannot afford the payments, then I’m sorry, but it is not “your home.” But there *is* something to be said for striving to keep houses in the hands of people who are willing to care for them. Nick’s second paragraph, above, says something about this, but let me say a little more.
I’m renting right now. My biggest reservation about buying is not so much the prices (it would be nice to see them fall a little more, but I’m starting to see units available at or near rental parity, which makes them a good deal in my eyes) but the thought that I might be buying into a neighborhood where my neighbors will be foreclosed on and houses will be abandoned, and that will attract vandalism, crime, and disrepair. Or, more likely, that I will be buying into a condo building where my neighbors will find themselves unable to pay their condo fees, and I’ll end up having to pay a disproportionate share to cover them.
If all the people who “deserve” to be foreclosed on are foreclosed on, prices will fall (as well they should), but I’m not sure there are enough buyers with good credit to buy up all the homes. So prices will fall more, until they reach a level where they are affordable even to buyers with foreclosures on their records – i.e., the previous “owners” of the houses. So the upshot is that the people who “own” the houses now will end up back in those same houses, but with a lower level of debt on them. The plan Biden describes is really just a way to accomplish the inevitable but with much less turmoil in the interim.
I heard him too. I had to rewind TiVo to be sure I wasn’t hearing things. What an idiot. How in the world can you reduce someone’s principal payment – w/o passing that on to someone else? Who pays? People who are the fence about this election need to understand what they’re getting with an Obama/Biden ticket.
Bill asks, “How in the world can you reduce someone’s principal payment – w/o passing that on to someone else?”
Of course it is passed on to someone else, just like any debt discharged in bankruptcy is passed on to someone else. If someone owes you money, but they declare bankruptcy and the debt is discharged, you are SOL. That’s how bankruptcy works, as I understand it.
I heard Biden, too. I believe that he misspoke when he said that bankruptcy courts can lower the interest rate of a mortgage. One’s house and land are pledged as security, or collateral, for the mortgage. If the mortgagor (they guy who bought the house with borrowed money) doesn’t pay, the mortgagee (the outfit that lent the money to buy the house) may foreclose and take possession. I’m not a lawyer, but to my knowledge, bankruptcy courts cannot alter the terms of a mortgage in any way.
Obviously, if any bozo could have his principal decreased just by being a deadbeat, no one would be able to get a mortgage at all. Biden and Obama, as good communists, would very much like to abolish private home ownership and put us all into government housing. And yes, the statement does appear on their campaign web site here, under the heading “Close Bankruptcy Loophole for Mortgage Companies”.
I HATE this idea. I might as well go buy a 500 k house if they are going to help me pay for it. That is not smart in my opinion and it will get abused.
well get use to the idea, because that is what the “taxpayer” and congress wants: to keep people in their howmes that they couldn’t afford to begin with.
It really sucks for all of us that chose responsibly. I can’t believe they’re rewarding bad behavior and all of us who were responsible are the ones paying for it. GRRRRRR. It really makes me mad because I know several people who have declared bankrupsty several times and they fritter their money away on stupid stuff, then when they can’t pay all their bills they declare bankrupsty keep their homes and move on like nothings happened. Meanwhile, I don’t have cable, don’t eat out, don’t buy clothes, don’t get my hair & nails done and save, save, save and don’t get in debt and I’m the one that gets screwed because I’m paying higher prices for things and higher taxes to bail everyone else out.
I was super happy to hear Palin say Americans need to buckle down and live within their means. We need to hear more of that in Washington, make people be responsible, encourage saving and staying out of debt. We’re all crying that the CEO’s shouldn’t be rewarded for their bad deeds, but all those people crying foul want cheaper healthcare, want to be bailed out of their mortgages, declare bankruptsy when they get in too deep. Tthey don’t want to pay for their own mistakes but they want to make sure others have to pay for theirs. A bit hypocritical if you ask me.
I don’t think it’s a bad idea at all. The bank is likely to get more money than the would if it went into foreclosure and the debtor gets to stay in their house. I’m not sure that the catch is that big. It’s not all that dissimilar to a short sale in financial terms.
I think the thing that you’re all forgetting is that in a bankruptcy, just because someone owes $X doesn’t mean that their creditors get $X. The principal remaining would need to be less than the amount the place would get in foreclosure sale – so probably more than 75% of the original loan. The only issue really that’s interesting is whether the loan forgiveness would be taxed.
Sorry…I am going to be a bit of an egghead here. I studied Economics and this Presidential election has been so fascinating because I see how radically different the Obama/liberal camp is from the McCain/conservative camp. It is a matter of socialism vs. capitalism, quite frankly, and it will be interesting to me to see if the American people want change so badly, they don’t even realize what kind of change they are asking for. I heard that comment too about the bankruptcy courts decreasing your principal and also Biden’s comment that he and Obama would advocate windfall taxes on oil companies – essentially take back the profits that oil companies have made in recent years because the scarcity of their product made the prices rise. (I use this example because it is very near and dear to everyones daily life). The oil companies didn’t “screw” people and raise the price of gas to be @ssholes, though the left-wingers like to use this a way to enrage people. Prices rise for a couple of reasons – the demand went up, the supply went down, or both (which exacerbates the effects). In recent years, it was both. I’ll just point out the simplest/most obvious. Demand went up because a lot of developing countries, esp. China, were booming and they wanted oil for their manufacturers. At the same time, supply went down because of (a) geopolitical unrest (not just in the Middle East, but in Africa, Venezuela…a lot of the countries that have oil are not very stable to begin with); (b) there was a shortage of refineries in the US. Crude oil needs to be processed and due to strict environmental lobbying in this country, there has not been a modern refinery built in this country for decades; (c) some scientists have argued since the 1970s that we are going to hit a period of “peak oil” when oil supplies are simply running out. If you understand the mechanics of supply and demand, then it is very obvious why the oil companies made profits in the past few years. Everyone wanted their product and they raised the price. However, the left wants people to think that the oil companies are not being “fair”, that they should give back what they earned. They are banking on the American people being frustrated and not thinking things through. I understand it is easy for a person who couldn’t afford to fill up their tank to hate the oil companies…but once the American people think it is OK to take profits away from a business – where does it stop? Suppose everyone thought Apple should give back some of its “windfall” profit because so many people bought the ipod and iphone. Suppose the government decides gas stations are part of the “high gas problem” and they are “hurting customers” and the local small-business gas station owner is forced to give back his profits. Not only is this not fair to the business owner, but what will make any business want to set up in America and give Americans jobs if they knew that if they made any profit that was deemed “unfair” or “too much” by the American people and the government, they would have to give it back in the form of a windfall tax? Companies would leave the US for countries where this kind of thing doesn’t happen and take (our) jobs with them. This is not just a theory, but has been proven time and time again.
The Biden/Obama campaign has been rife with these socialist, wealth-distribution ideas for a very long time. I don’t think Biden mispoke when he said he would allow the bankruptcy courts to reduce your principal. I think he and Obama actually believe that if you were “lured” into a loan by a lender and you can no longer pay, then the courts should be able to relieve you of your burden. They have no consideration for personal responsibility – in fact, I think they rely on people who dont believe in personal responsibility to support them. They have no consideration for what’s “fair” to the lender, or to any corporation because they believe corporations are inherently bad for society. If you read a short treatise on socialism, like on wikipedia, you will start to identify many of the altruistic things Obama and the left are pitching as nothing more than government nationalization of the private sector and government intervening/controlling a market economy. Again, socialist economies have been known to fail time and time again because the government does not always know what is best for the markets.
Even the current subprime mortgage mess was a result of government intervening in the markets “for a social good” (the idea of home ownership for all, including low income borrowers who clearly could not afford it). Organizations like ACORN, government regulated entities like Fannie Mae and Freddie Mac, with help from the Democratic Congress (some of those guys are still in office…Chris Dodd, Barney Frank etc) got mandates and incentives to underwrite more and more subprime loans. Usually, when a lender lends to a risky borrower, they charge a higher interest rate (e.g. like credit cards…that is unsecured debt). BUT – these government rules about “fair lending” called charging a high rate “predatory” or downright “racist”. So the lenders hands were tied – they couldn’t underwrite debt that was priced appropriately. In comes Fannie and Freddie who gets the mandate from the government to buy more of these risky loans. So the banks and mortgage originators thought – great, the government is here to buy them. We don’t have any skin in the game – let’s keep underwriting these things and sell them to Fannie and Freddie and Wall St. Fannie and Freddie was a great gravy train for the Dems…the CEO of Fannie Mae, Franklin Raines, who was ousted for cooking the books to increase bonuses, gave millions to the Dems and is now advising the Obama campaign. I don’t care if you are liberal or conservative – that is downright wrong and as an American I am disgusted.
Finally (sorry for my super long post btw 🙂 – you bring up a good point about why you as a business owner would ever extend credit knowing it would be overturned on a whim. If this type of “it’s not my fault, I didn’t read the fine print, I didn’t know what I was getting into – save me” attitude continues in our society, I agree with you that it would be very difficult to do business in that environment. I think we need to start taking some personal responsibility and take the moral hazard out of our lives, constantly expecting the government to come bail us out.
what cracks me up about this all…is that the american people who are for the bailouts are ok with multi-billion dollar companies getting more free money, and btw, today wanting even more, but yet, if a normal “joe sixpack” as said by caribou barbie has a chance to straighten themselves out for some really dumb mistakes, then that is a “bad thing”.
yeah, socialism is really really bad…just look at the great position we are in with capitalism…capitalism=greed…the rich got richer off this deal, and the dumb poor will be living in the streets when their house gets repo’ed…then what, they will be living on food stamps and even more government assisted living (aka chapter 8)
big picture>small issue
one of the ceo’s of one of these firms was making 13.7 milion in 18 days….yes, look at those numbers…and please don’t tell me that they earned it…it was because of the whackass laws that allowed it to happen.
(plays the who’s won’t get fooled again)
@Lily…
I couldn’t have said it better myself
I am surprised that nobody has come back here to comment on McCain’s “plan” that he announced during the debate this week: To force taxpayers (future taxpayers more likely than present taxpayers) to pay off the mortgages of all the people who can’t (or maybe just don’t want to) pay them themselves.
At least with the plan Biden talked about, you only get your mortgage reduced if you declare bankruptcy, which is kind of a big deal, and the banks at least ostensibly take a hit for making irresponsible loans. McCain is saying that the banks should be let off the hook completely and only the taxpayers should be left holding the bag.
Of course, at the rate McCain is changing his mind about everything these days, the fact that he talked about this plan this week substantially lowers the chance that he’ll support it next week, let alone implement it.
I do agree, those who knew they were getting a loan for a home that they couldnt afford are dumb and dont deserve help. Then there are people like me who bought a home for their family and then got screwed financially. When we bought our home we could afford it without any problems. Now we cant. My wife who holds 2 jobs is losing out on about $1000 a month. She is in the appraisal business and obviously business just isnt what it was. She also is a waitress. Even with the tough economic times people still want to go out and eat yet they feel that the servers dont need to be tipped.. My wife gets stiffed on tips on a regular basis now. I myself just found out yesterday that my employer is cutting my pay $1400 a month. To sum it up we are bringing in 2400 dollars less than we were 2 years ago when we bought our house. Our mortgage is $1500 and there is no way we can afford it. We dont even know if we are going to be able to buy Christmas gifts for our children this year. Is this whole situation our fault. I dont think so, therefore I hope that this bailout plan will be able to help people that have been put into situations like mine. For my family’s sake.
Ok there is no need to overanalyse this. Basically we have to acknowledge that there is no real free market system not in the way Smith envisioned it. These huge coorporations are just as bad for the free market as a monopoly. There is no way that the average person stands a chance of getting by fairly when dealing with these companies so you DO need government intervention to even the playing field. The problem is now government is left trying to correct the problem instead of not allowing it in the first place. The only government policy should be simply: people should not be able to borrow money they cannot afford to pay back. That is bad for everyone. We can all see this clearly now as the markets crash and burn, and the few people who have been debt free making smart investments are still affected as the value of their stocks and homes decline . The banks know when you are at high risk for not being able to pay back loans, they have professionals dedicated to figuring this out. Credit card companies love having you spend uncontrollably as long as you are paying the minimum balance, they are making money. There is already too much government intervention it is too late to say there shouldn’t be the bailout bill passed, what we should be demanding is that the government intervention is well thought out and effective. The bailout clearly wasn’t.
Oh I just had to add one more thing in response to Lily I was an Econ major too. I think that it would be wonderful if everyone understood what they were getting into and didn’t end up taking out loans they can’t afford. However that is NEVER going to happen, I’m sure you had to take an economics for society course and you know that is true. If you think about all your friends and family you would probably find 70% of them are not managing their finances well. Most people do not understand how to deal with money and while it is not the government’s place to babysit citizens I think we can all clearly see that when there isn’t effective regulation everyone suffers since we do not live in our own bubble.
Is anyone out there thinking? We have a major problem. We are here now. Everyone needs to think, we need to fix this. It does not matter who is at fault – it is a little too late for that!
People need to stay in their homes. This is the only way. The simple plan that the government needs is to take mortgages made in the last few years – refinance them at a rate such as 5.25% no questions asked and keep the economy going. Don’t we have enough problems without making things more
difficult. People stay in their homes, the value of other people;s homes remain stable- because your neighbor is not selling at a loss reducing your home value. If they do not sell ( how could they the banks are not giving any loans! however that’s another story?) they will be foreclosed on. Another family distroyed. Foreclosures only hurt the economy and there goes Wall Street! Wake Up People –
Hello: Over the years I have purchased 8 homes and rental properties. Never, even right now, when applying for a loan have I been able to just SAY to the banks what I make, how much I owe, etc. without proof. You need 2 years federal tax papers, W2s and 1099Rs, where you worked and for how long (any bank can find that out) what I owe (credit reports show a lot more than that and any bank can find that out) the credit reports show your whole history and credit score. So, any bank that gave out these bad loans without proff, thats their fault not the ones that got those loans.
On some TV talk shows they have people on who need help because they bought tons of mdse.,food, etc. ,some bought very expensive items, they didn’t really need and some never even used the items. These people need a smack in the face because that bought much of the mdse. on credit cards. Like, what average person needs 60 pairs of shoes, $2000.00 purses, etc. I believe these people are trying to live up with the Jones and the Jones are the the silly movie stars, etc. who make millions, do foolish things, and its considered to be OK by the TV media who push that stuff on us.
Is anyone else out there who is sick and tired of the shows on TV, like I am, while having to pay high cable bills and not really getting a choice of what to watch. However, there is not one person who can say they never made foolish mistakes when it come to spending money and I don’t care who they are. The only one who never did, on this earth, was Jesus and his mother.
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