Congress is considering legislation called the “Helping Families Save Their Homes in Bankruptcy Act”, which would allow bankruptcy judges to change the terms of a borrower’s mortgage contract (cram-down). I believe this proposal would benefit a small minority homeowners, but would severely worsen the outlook for the rest of us.
Allowing a Bankruptcy judge to unilaterally change the terms of a mortgage contact will force lenders to compensate for the added risk by: increasing down payment requirements, charging additional fees, and/or increasing interest rates. An article in the Atlanta Journal-Constitution reports that analysts predict a resulting increase in interest rates of 1.5% across the board.
On a $300,000 loan, for example, the current interest rate of 5.25% would require a payment of $1,657 per month. If bankruptcy reform passes, rates would go to 6.75% or $1,946 per month. The borrower would be looking at an increase of is $289 more per month; $3,468 per year; & $104,040 over the life of the loan. This will adversely impact home values, home buyers, and home owners looking to refinance.
- By Dale Bohannon
