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Thursday, October 04, 2007

Proposals to Stop Foreclosure

by Calculated Risk on 10/04/2007 04:34:00 PM

From Bloomberg: Subprime Borrowers' Payments Should Be Fixed, FDIC's Bair Says (hat tip Brian)

Federal Deposit Insurance Corp. Chairman Sheila Bair called for payments on most subprime mortgages to be fixed at current levels.

Lenders should extend "teaser" rates on all subprime adjustable-rate mortgages if the borrowers haven't missed any payments and they live in the homes, Bair said today in New York. Modifying loans on a case-by-case basis and fixing rates for limited periods won't avert enough foreclosures, she said.
And from Congress: (hat tip NYT junkie)

House: "Miller and Rep. Linda Sánchez Introduce Legislation to Protect Consumers in Financial Distress from Losing Their Homes"

Senate: Durbin Introduces Bill to Help Hundreds of Thousands of Homeowners Avoid Foreclosure
To help families save their homes, the Durbin bill would:

* Eliminate a provision of the bankruptcy law that prohibits modifications to mortgage loans on the debtor’s primary residence, so that primary mortgages are treated the same as vacation homes and family farms.

* Extend the time frame debtors are allowed for repayment, to support long-term mortgage restructuring.

* Waive the bankruptcy counseling requirement for families whose houses are already scheduled for foreclosure sale, so that precious time is not lost as families fight to save their homes.

To further help families get back on their feet financially as they go through bankruptcy, the bill would also:

* Combat excessive fees that are sometimes charged to debtors in bankruptcy.

* Maintain debtors’ legal claims against predatory lenders while in bankruptcy.

* Reinforce that bankruptcy judges can rule on core issues rather than deferring to arbitration.

* Enact a higher homestead floor for homeowners over the age of 55, to help older homeowners who are fighting to keep their homes as they go through bankruptcy but live in states with low homestead floors.

* Reinforce that consumer protection claims are still available in bankruptcy.
And from Sentor Specter: Specter Introduces Bill To Combat Home Mortgage Crisis

And there is a growing backlash against the bailout proposals, from CNNMoney Subprime: Bailout backlash
But judging from the hundreds of reader responses has received in recent weeks, "foreclosure prevention" sounds a lot like "bailout" to many Americans, and they don't like it one bit.
Joseph Mason, an associate professor of finance at Drexel University and a senior fellow at Wharton, argues in a research paper released Wednesday that proposed remedies could actually make things worse and even that troubled borrowers have gotten some benefit from their loans.
One proposal seems to be garnering support from everyone: exempting homeowners who foreclose or otherwise have some of their mortgage debt forgiven from having to pay income tax on the forgiven amount.
Who is this "everyone"? I support no income taxes on debt forgiveness on the purchase debt (or equal amount if the homeowner refi'd), but for homeowners that borrowed money on their home - tax free using their home as an ATM - shouldn't they be liable for the taxes on that forgiven debt? What a mess.

Note: Say someone bought a house with a $200K first, and then loses the house in foreclosure. I don't think there should be any tax consequences. But if they borrowed an additional $50K tax free (now owe $250K) and then lose their home in foreclosure, I think they should be liable for taxes on the additional $50K.