Saturday, May 2, 2009

Why Would Banks Want to Kill a Law Allowing Bankrupt Homeowners to Renegotiate Their Mortgage?

While following the defeat of Sen. Dick Durbin’s (D-IL), I started to wonder why banks would want the “cram down” amendment defeated. I Googled “cost of foreclosure” and found this from Business Week which was originally published May, 2008:

Everyone knows the price of foreclosure on home owners. They lose a place to live, their credit rating, whatever down payment they made, their hopes, their dreams.

New numbers from ratings agency Standard & Poors spells out the cost to mortgage investors. For the 2006 vintage of subprime loans it’s about 19% of the loan amounts outstanding.

How do they get those numbers? S&P figures an astonishing 42% of the loans made that year to borrowers with bad credit will go into foreclosure. Then it calculates that about 45% of the amount owed on those loans will be lost. Here’s the breakdown on that: 19% is lost due to the decline in the market value of the home. That’s about a $40,000 loss on a typical loan of $210,000.

Then there is the 26% lost to the costs of foreclosure. It can take a year or more to go through the whole process from when a borrower stops paying to when the house is finally sold and the lender recoups whatever money it can. There’s 13.6% of the loan amount lost in interest payments. About 3% of the home value the lender has to pay in property taxes. There’s 1% in legal fees, 6% to real estate agents, about 3% of the loan spent on home maintenance.

Nobody wins.

I also found some other numbers from March 2009 from Ralph Roberts at Realty Times:

According to a report by the Joint Economic Committee of Congress, the average foreclosure cost amount to about $151,000, with several parties picking up the tab:

Homeowner: $7,000

Lender: $50,000

Local government: $19,000

Impact on neighboring home values: $75,000

Estimated total cost of one foreclosure: $151,000

This doesn’t even account for other potential costs, including the cost of lost productivity, a reduction in a family’s purchase power, lost federal income taxes, and the emotional and psychological costs of losing a home and losing friends and neighbors.

Based on these numbers, I’m beginning to wonder if the banking lobby was fighting this bill out of habit. Unless I am misreading this, I don’t see an upside for banks to force people into foreclosure. It doesn’t make any sense.

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