Barney Frank's ultimatum to the mortgage industry

The amount of irresponsible and in some cases fraudulent borrowing that took place during the bubble years is astonishing. All we ever hear about is the big bad banks that are trying to take away people's homes, and the occasional sob story about someone who got sick and couldn't pay the mortgage. The media just gloss over the stories of the typical "overreaching" homeowners.

"Overreaching" is just another word for "greedy." People felt like they were entitled to live in big, newly renovated houses, simply because the banks told them that was the maximum they qualified for. Were the banks stupid for lending these people so much money? Absolutely! But when they issued the loans, they knew there was a backstop: either the homeowners had to keep up with the loan, or the bank could sell the house to recoup their losses.

With forced principal cramdowns, we're taking that backstop away from the banks. This helps already-in-trouble homeowners, but will make it harder to qualify for a mortgage in the future.

In a strange twist, the commenters here who are most likely to get upset from Frank's proposal (all of us still-renting heathens) will probably indirectly benefit if it goes through. We are, by and large, people who are cautious with our money, people who could buy now but would rather wait a little while and save some more, which in many cases translates to relatively high savings, low debt, and high credit scores. We're unlikely candidates for overreaching when we do decide to buy. So we'll likely qualify for a mortgage fairly easily.

The people who get hurt are the people who, a year from now, would barely qualify for a mortgage under the current rules, but under the new forced cramdown rules, the banks consider just barely too risky to lend to. Those people, who would otherwise buy, will be excluded from the market. And with fewer potential buyers out there, prices will suffer.

Winners: bankrupt homeowners, well-qualified prospective buyers
Losers: non-bankrupt homeowners, barely-qualified prospective buyers

I say it would have been nice if Barney Frank had been paying attention before the crisis, instead of grandstanding after it. Barney should be concentrating on making sure that we do not have another meltdown--not trying to strongarm lenders so that he can claim that he is doing the right thing.

"The mortgage industry helped plunge our country into the worst downturn since the Great Depression, writing millions of hideously bad loans."

Agreed. However, buyers who took out the hideously bad loans are also equally responsible. If you can't be bothered to read it or don't fully understand it, don't sign it.

LOL,

Barney Frank presided over the Freddy and Fannie disaster, pushed for low income home ownership, and pimped the disastrous CRA. He has to be one of the biggest players in this economic disaster.

How could anyone in their right mind give any credence to this Moron???

Our court system is turning into a instrument of criminality, where in the constitution does it give the courts the right to breach contracts and rewrite mortgages?

We have gone from being a nation of laws to a nation of men

What difference does it make? Whether loan values are "crammed down" by bankruptcy judges, or whether banks modify loans voluntarily, the end result is the same: massive future write-downs of mortgage assets.

The industry is responsible of course just as the home owners are, I wonder though how many of them took to these irresponsible tactics to avoid being called racist by "civic" organizations because they couldn't make traditional loans to minorities? How many figured in the long run it would be cheaper to make the bad loans rather than be boycotted and harassed? Well guess what they are still being harassed by the same "civic" organizations that advocated for making questionable loans in the first place. The banks are damned if they do and damned if they don't. Those cram downs hurt the average person as those cram downs affect their 401k that holds the mortgages in the form of MBS securities. Should the banks make modifications, sure, but lets be sure that the modifications are fair and not just a right down of principle, lets include extension of the term of the mortgage as well.

The fact of the matter is that not everyone can be a homeowner. It is time for banks to stop making risky loans and time for people to be responsible and save save save if they want to be a home owner regardless of your ethnicity. How about we stop asking about race on those mortgage forms and just look at income and savings?

Barney Frank's, remind's me of the old medicine traveling salesman. Operating from the back of a cart, going from town to town selling his old remedy of snake- oil used for all ailments!

Barney and the rest of our representatives, missed the boat. And want to stay on course, as did, the old snake oil salesman. But alas, no Sheriff at watch!

The word was out in 1992, recorded in the library of Congress. Titled "Foreign Investment in the United States and Foreign Investment in United States Real Estate".

These volums were at the pleasure of the congress, had the opportunity to close the loopholes. If this information was digested, legislation revisions should have prevented the feasco. Yet no safegards provided. Should we not look to the legislative committee. Over-seeing, these legal aspects of review. These are trusted appointments! What a miscarage of Justice, and Juris Prudance. A true smug insult from our Legal community! Allowing this sham of the America, we are sworn to defend at all cost?

Scott,

My reaction to your column was to be UTTERLY flabbergasted and DISMAYED.

a) The banks are doing everything that they can to put off/postpone foreclosing, doing short sales, AND doing modifications not because they are trying to be "mean banks" but because i) if they do it with loans that they currently hold, IT WILL COST THEM MONEY, which will cause them to report losses, which if its all done within a short period of time, WILL CAUSE THE BANKS TO FAIL. The only way for the banking system to survive without being nationalized is for them to SLOWLY take their losses so that their earnings can cover those losses.

And if the banks fail and/or take excessive losses, its going to be US, the hard working tax-payer/saver/renter/frugal home owner, who is ultimately going to have to pay with our tax dollars to stabilize the system.

b) Does this mean pain and suffering for those who "stretched" to buy a house? YES. They stretched because they wanted a bigger house than they would "normally" have been able to afford, AND/OR wanted to "get rich" on housing prices "that were always going to go up". They took a chance on getting the GAIN, now they need to share in the PAIN.

Should the government also "bail out" those of us who bought a stock at $10, expecting it to go to $25, that instead went down to $5?

c) Many of these loans were packaged as securities and sold to investors, pension funds, etc. The banks are merely SERVICING these loans, and do not have the legal right to modify them. Their options are to either bring the loan current, OR foreclose.

d) Many of the loans that are having issues were the "toxic" no-doc loans. The reason that many of the current "homerenters" got these loans was that THEY WOULD NOT HAVE QUALIFIED if they actually had to go thru the proper loan approval process. The "redefault" rate on "modified" mortgages seems to be upwards of 50% within months of the modification, from what I have read. In other words, modifying the mortgage didnt help, because the didnt have the income/job in the first place to support them being a "homerenter".

And with home prices expected to drop another 10-25% in the coming years, this is only going to get worse, not better.

Lets not try and paper over the problem with such stupid measures as Barney Frank is proposing. Let the "homerenter" that cant afford his mortgage payment become a REAL "renter", let them build up a savings amount for a 10% down payment, have a steady income to justify with documentation a bank giving them a loan, and THEN let them become a "homerenter" again.

Oh! This is a terrific idea! Let’s reward all the deadbeats that can't / don't pay their mortgage because they drained their equity (refinanced) to buy a car or to remodel the kitchen......or didn't have the brains to understand what a variable rate loan was!?! Wah wah! You thought there are way too many people not paying their mortgage now? Wowza! Lets just open the floodgates and invite everyone to tear up their mortgage payment coupon book, thinking that the Fed will swoop in and write them a new loan at half the price! This (idea) ranks right up there with the old no-doc loan programs (that got us into this mess) as being the stupidest idea yet!
The only reason a mortgage should be modified is if someone has lost a job (and can provide proof of that). In that case, lenders should do whatever they need to do to expedite the loan modification process.
Otherwise, If Barney gets his way, this attempt of his to garner votes will completely derail what little economic recovery is taking place.
Very BAD idea - and anybody that thinks otherwise, has probably already thrown their payment book into the fire.

So let me get this straight...
Barney Frank fights to change the way the lenders and banks are rated so banks are forced to start giving out questionable loans based on geographic location and not just the strength of someone’s credit and ability to pay the loan back in order to keep a good rating with the government. People who never would have qualified for a loan can now get a loan and start buying houses because they can. Good old Barney Frank pats himself on the back and wants to show how he helped bring affordable housing to underserved areas.

Fast forward and people who never should have received a loan start defaulting because they an not pay for a loan they never should have received. Mortgage crises start, values drop, predatory lenders, bla, bla, bla.. Barney Frank wants more oversight and questions how could this have happened?! "Don't blame me it's the lenders fault!"

Give me a break! Now he wants to get tough on the people he strong armed to change their practices and then yell at them for changing? Not one bit of self awareness that he was part of the problem.

Barney Frank: Moron

Overextended Home-buyers: Morons

Banks: Predatory Morons:

Do not allow judges or banks to let people stay in their homes while lowering their mortgage balance. I am ok with adjusting the interest rate to a market rate fixed rate or extending the term of the loan. Heck, maybe even give the homeowner a year to get back on his feet.

If a homeowner wants to stay in his/her home, they should be expected to pay back the full amount of the loan under reasonable market terms.

Otherwise, Get Out and find an apartment.

full amount borrowed at some

...where in the constitution does it give the courts the right to breach contracts and rewrite mortgages? - bc2000 (#4)

Article 1, Section 8: "The Congress shall have the Power ... To establish ... uniform Laws on the subject of Bankruptcies throughout the United States"

(Ellipses are just there to skip over other enumerated powers of congress.)

Barney Frank is a congressman proposing that congress votes on a new law, which the courts will enforce if it is passed. You can disagree with the proposal, but if it passes congress, it's certainly constitutionally valid.

If you want to understand the implications of cramdowns (especially Scott), read Tanta's excellent review on calculated risk blog entitled "Just say yes to cramdowns".

Boy you can tell the previous writers are folks who have never had to worry about a dime in their lives. I'm sure none of you have ever been laid off from a job. Maybe you're all trust fund babies? It isn't the homeowners fault that the value of their home went DOWN even though the mortgage and its payments stayed the same. Some sellers can't even sell their homes without having to pay at the closing because the value of their property AS APPRAISED BY THE BANKS prior to lending was so out of whack. Telling some homeowner with kids that he or she was "stupid" or "deadbeat" just doesn't cut it when the the foreclosure wolf is standing at the door. It's people with money who keep money and then chastise the rest of the world for not using common sense.

Barney Frank along with Clinton forced banks to give these bad loans in the first place. Now he want them to start doing it again? How by threatening them with abusive of power so heineous it is outlawed in the constitiution. You Barney are one of the chief causes of the collapse, you don't know the first think about finance and prove over and over why you shouldn't be allowed to balance my checkbook never mind head the Finance committee.

Red, White & Blue:

You say:

"It isn't the homeowners fault that the value of their home went DOWN even though the mortgage and its payments stayed the same. "

Not completely, but IN PART IT IS their fault. When you buy something, especially the BIGGEST purchase of your life, you need to be prudent about it.

It is completely naive and irresponsible to assume that your home price can never go down, and that you are entitled to a "discount" on what you paid, just because market conditions changed.

If gas goes to $4 again, are all SUV owners entitled to demand a reduction in their vehicle payments, since it costs more to operate their gas guzzler now, AND therefore its worth less than what they expected?

You buy a home, and agree to pay XYZ $$$ per month for it. If it goes up in value, you GAIN $$$ in equity, NOT the bank. If it goes down in value, you feel PAIN, and you have the option of walking away from the house and letting the bank foreclose.

NOWHERE in the contract that you signed, does it say "IF the value of the house goes down, the bank will lower the monthly payment to match that lower value".

Its that simple........

Frank has become a freak show. He was one of the biggest disciples of everyone having a house/CRA in the recent bull market in housing. He should resign and just go away...

If you're not part of the solution, there's great money to be made in prolonging the problem.

Hey Red White and Blue

I am not against restructuring the interest rate to a market interest rate (5.5%) or extending the loan to 40 years. You bought the house, you pay for it or leave it!

End of story. I am all about the banks finding a way for you to stay in the house and eventually pay down your loan as you agreed to.

Write down your loan balance because you think you paid to much... With that mentality, you dont deserve to own a house.

Stop with the CRA and "banks were forced" crap, do some research...

"First, consider timing. CRA was enacted in 1977. The sub-prime lending at the heart of the current crisis exploded a full quarter century later. In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as noted by the New America Foundation's Ellen Seidman (and by Harvard's Joint Center), that activity "largely came to an end by 2001." In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards. Yet sub-prime lending continued, and even intensified -- at the very time when activity under CRA had slowed and the law had weakened"

The CRA was not dominant player in the housing bubble, but it was still a factor.

The Federal Reserve and Allen Greenspan's artificial interest rates were the biggest factor in the formation of the housing bubble.

The banks did not care about the lending standards since they could just package the mortgages and sell them off to the Fannie and Freddy that may explain why there was little activity with CRA after 2001.

Of course, Fannie and Freddy were also bigger players in this mess than the CRA.

Once Wall Street started buying mortgage backed securities, the banks started to really get creative with their mortgage products. These toxic securities continue to be peddled on Wall Street to this day. Many of these firms are insolvent because they mark these toxic assets at what ever price they want

Helicopter Ben Bernake still pursues the foolish policies as Greenspan, but on a much greater scale.

We are in for long depression