The mortgage package that passed the House on March 5 is currently gummed up in the Senate, as various Senators — reportedly led by Sens. Evan Bayh (D-IN) and Arlen Specter (R-PA) — try to limit the borrowers eligible for cram-downs. Cram-downs enable a bankruptcy judge to lower mortgage payments for those who owe more than their home is worth and have exhausted all other options.
While the Senate dithers, new information has come out showing just how vital the mortgage package is. According to a new study conducted by the University of North Carolina at Chapel Hill’s Center for Community Capital, the Obama administration’s housing plan, along with cram-downs, can significantly lower the rate of mortgage defaults:
Letting homeowners reduce their monthly mortgage payments can significantly lower the rate of defaults compared with loan modifications that do not reduce payments…Further, combining lower payments with a write-down of the loan balances for loans that exceed the value of the home can prevent even more defaults.
According to the study, “homeowners who obtained a rate reduction were about 13 percent less likely to redefault than similar borrowers in similar situations who received a traditional modification. Those whose rate reduction was accompanied by a principal reduction were 19 percent less likely to redefault.”
As author Roberto Quercia said, “our results support the Obama administration’s efforts to seek more broad-based, systematic loan restructuring.” Quercia and co-authors Lei Ding, and Janneke Ratcliffe also noted that their study is “consistent with current bankruptcy reform efforts to pass legislation that would give bankruptcy judges new power to restructure mortgages and reduce mortgage payments.”
Bayh and Specter, meanwhile, want to limit cram-downs to subprime loans. However, the housing crisis has already spread well beyond subprime loans, so addressing them alone would be inadequate and behind the curve.
Skyrocketing unemployment is only going to exacerbate the housing crisis, which in turn blunts the banking rescue, as more foreclosures leads to more toxic assets on bank balance sheets. So a sensible solution to housing is desperately needed, and it needs to reach as many troubled homeowners as possible.