Bankers Oppose Judges’ Role in Heading Off Foreclosures

by Donald Hanz on Foreclosures

The bankers who had a big part in the flood of foreclosures that downed the housing market and the national economy are blocking a significant solution to the problem, according to Henry Sommer, author of bankruptcy textbooks and an attorney at Consumer Bankruptcy Assistance in Philadelphia.

Sommer is referring to the Mortgage Bankers Association who had been campaigning against President Barack Obama’s proposal to grant judges the authority to modify mortgage terms to make monthly payments affordable and stop further foreclosures.

The MBA, led by its chairman David G. Kittle, sent a letter to Congress saying Obama’s proposal to involve the judicial process in his program to mitigate foreclosures would worsen the mortgage market by increasing mortgage lenders’ risks and encouraging bankruptcy filings. The MBA also said that the proposal would make it harder for people to buy a home because investors would shy away from investing in uncertain mortgages.

Kittle even suggested that Citigroup has supported Obama’s plan to involve judges in stopping foreclosures because it is indebted to the federal government, having received much of the $700-billion Troubled Asset Relief Program funds. He said the federal government already owns 40 percent of Citigroup.

Sommer responded to the MBA campaign by arguing that the mortgage bankers had a big role in the housing crisis. They offered exotic mortgages that the borrowers did not fully understand, offered loans to people they did not screen and created complicated financial instruments such as collateralized debt obligations and mortgage-backed securities to make more money from the mortgage loans. Sommer insisted the real cause of the bankers’ opposition to the proposal is their refusal to accept the losses they created and their fear of write-downs.

Mark Zandi, leading economist at Moody’s, is another supporter of the judicial involvement proposal. He explained that the Homeowner Affordability and Stability Plan would grant mortgage lenders and services about $5,000 for each loan restructured. The involvement of the judicial process would complement the cash incentives in forcing mortgage lenders to consider loan modifications. Under the Bush administration, officials depended on voluntary modifications from the lenders and got nothing.

Zandi said he initially was against the proposal, but he saw what it can do to head off foreclosures. He reiterated that continued foreclosures do not affect only those Americans losing their homes. The foreclosure crisis has affected everyone, including people in other countries.