Foreclosures in Massachusetts have tripled in one year. Sensing a full-scale crisis, the governor set up a $250 million rescue fund to try to help families get out of crazy mortgages and into affordable, fixed mortgages. The Globe reports this morning that so far not one single family has qualified for the rescue. Other states with similar funds are also reporting dismal results.
There are many reasons for the failure, but a critical problem centers on the hostage value of the house. Rescue programs limit their payouts to 100% of the value of the property, which makes sense both to protect the fund and not to reward the mortgage lenders by paying them more than they could get for the house if the family gave it back to the lender. But the mortgage lenders want more. If they don’t get it, they won’t release the mortgage — even though the lenders won’t get anything close to 100% of the value of the home if they are forced to foreclose. They hold the home hostage: Pay the amount the mortgage company wants or move out of the house. Some families will find the money to pay, and others will lose their homes.
Bankruptcy laws generally end a secured lender’s hostage value by forcing the lender to accept the full value of the collateral, releasing the lien, and treating the rest of the debt as general unsecured credit (just like credit card loans and payday loans). But current bankruptcy law creates an exception for home mortgages: they can’t be stripped down to the value of the property. All other loans, including all business loans, car loans (with some timing exceptions), and real estate loans for investment property or vacation homes are subject to strip down, but not home mortgages. In other words, every borrower has this option — except a homeowner trying to save his own home.
This week the House passed a bill to treat home mortgage like all other loans. The mortgage industry is fighting it like crazy, and Bush has announced his opposition. The amendment would give families a chance to negotiate deals that would take them out of ruinous mortgages and let them get into something that is affordable — with or without a rescue plan. The mortgage industry wants to decide “voluntarily” when they will or will not turn a homeowner loose.
The bankruptcy amendment wouldn’t be a panacea. Some of the two million families facing foreclosure simply cannot afford the homes they are in, even if the mortgages rates were reasonable. But an estimated 600,000 families could stay in their homes, paying 100% of the value of the home. That would be good for the family, good for the neighborhood, and good for the housing market generally. It’s a win-win-win, except for the mortgage lenders who think they might get a higher ransom.
