Lenders were asked to help — now, they may be forced to

McClatchy NewspapersMarch 4, 2009 

BIZ CRAMDOWN 1 RA

Joe and Angel Bostic's house payments ballooned from $891 to $1,600 a month for their home in Raleigh, North Carolina.

TRAVIS LONG — Travis Long / Raleigh News & Observer / MCT

WASHINGTON — Joe and Angel Bostic bought their East Raleigh home in 1994 for $150,000, when times were good and Joe Bostic had a thriving renovation business.

Now, he sits home on disability after a failed surgery, his wife works as a teacher’s assistant and their new bank says they owe $228,000 after their payments ballooned from $891 to nearly $1,700 a month.

The couple have filed for bankruptcy.

As the recession deepens and millions more families risk losing their homes, the U.S. House is scheduled to vote on one of the most debated pieces of legislation trying to address the nation's housing crisis.

Supporters say it could eventually affect an estimated 12 million homeowners like the Bostics who now are "underwater," or owe more on their mortgages than their houses are worth.

But the mortgage industry has made killing the legislation its top goal, and says it could hurt their books and increase interest rates for other borrowers.

In Washington, at issue is whether homeowners or banks will hold more leverage over the billions of dollars in toxic assets that have weighed down the housing market and sunk banks in the past year.

In Raleigh, the Bostics want to stay in the 1,800-square-foot house they've been in for 12 years.

"It would be a blessing," Joe Bostic, 65, said of the legislation. "If we could just have a fair ... mortgage we could afford with the money we have coming in, we could have a home we could stay in."

The bill would allow bankruptcy judges to alter the terms of a mortgage, a process known to the industry as "cramdown," if no other options remain for homeowners. Judges could extend the payment period or lower the value of the mortgage on the home to the existing market value. 

For the Bostics, that could mean reducing the total they owe from $228,000 to a figure closer to the county assessed value of $194,000.

Relatively few homeowners facing foreclosure would be able to use the provision because it would apply only to those in Chapter 13 bankruptcy. Chapter 13 bankruptcy allows debtors to keep their homes and pay back debts over time. In a Chapter 7 bankruptcy, debtors turn over their homes and liquidate all assets relatively quickly.

But U.S. Rep. Brad Miller of Raleigh said the measure would serve as a powerful incentive for lenders to work with other homeowners now burdened with hefty mortgages.

For months, banks have been encouraged to offer voluntary loan modifications on mortgages, but the results have been slight. The bill's supporters say the bankruptcy provision will coerce lenders to make loan adjustments on their own - or else face a forced cramdown from a bankruptcy judge.

"The voluntary modifications are just not happening," said Meredith Ezzell, chairwoman of the N.C. state chapter of bankruptcy attorneys. "And if (Congress) puts this in place, they will start happening. This is really the stick that we can hold over their head."

Miller, a Democrat and the architect of the measure, said that's why the banks are opposed to it.

"This doesn't beg them to do the right thing," he said. "It doesn't bribe them to do the right thing. It makes them do the right thing."

Miller said most people lose their homes because of circumstances beyond their control: job loss, divorce or illness.

That’s true of the Bostics, who say they were doing well financially when they first bought their home. Their monthly payments were less than $900, easily affordable with Joe Bostic's renovation business.

But about four years ago, he went into the hospital for a routine biopsy. He says a radiologist twice punctured his gall bladder by accident, spilling bile through his innards with grave results.

He struggled to work and refinanced his home with an adjustable rate to pay a dozen employees and his mounting medical bills. Eventually, he closed his business. He lost his health insurance. 

In April 2006, the couple filed for Chapter 13 bankruptcy.

Bostic now receives $447 a month in disability payments. His wife earns about $24,000, he said, as a teaching assistant at an elementary school in Durham.

They're paying just half their monthly mortgage payment, Bostic said, because that's all they can afford.

The late payments add up. The couple's January statement asked for a check for $27,854.61.

"I ask: Why can't they give us a payment that we can afford?" Bostic said.

During debate last week on the House floor about the bill, Republican U.S. Rep. Virginia Foxx of Banner Elk said many homeowners "don't want to pay the money back."

"They're living in a never-never land," Foxx said. "They think they're due this money for free. We're continuing the welfare mentality."

Others who oppose the bill argue it will encourage more homeowners to file for bankruptcy, and that it will inject new risks into the housing market.

"The problem with cram-down mortgages is that they make mortgages more expensive for future homebuyers," U.S. Rep. Sue Myrick, a Charlotte Republican, said in a statement. "We can't give judges the ability to tell homebuyers that they don't have to pay back the entire amount of their home loan and expect lenders to have any confidence in those they lend to."

Supporters say that isn't true.

"Humbug," said Robert Lawless, a law professor at the University of Illinois who tracks bankruptcy issues. He said banks want to preserve their leverage over the payback of bad mortgages.

"It's easy to scare people that changes are going to lead to big problems," Lawless said.

Lenders and mortgage banks have spent millions to oppose the bill and announced a year ago that they would make killing it their top priority. Companies poured money into political campaigns, hired dozens of lobbyists and started a new Web site, stopthecramdown.org, to publish the industry’s views.

The Center for Responsible Lending, based in Durham, helped Miller craft the bill two years ago and has its own staff working Capitol Hill.

"It could mean the ability of many folks who are losing their homes to stay in their homes," said Bill Brewer, a Raleigh lawyer and vice president of the National Association of Consumer Bankruptcy Attorneys. "This is just one of the factors that helps ensure the real estate market stops plunging. It's part of the road to recovery."

If the bill passes the House as expected, it goes on to the Senate, where rules make passage more difficult.

In Raleigh, the Bostics said they'll take any opportunity to keep from losing their home.

If the flawed surgery hadn’t occurred, Bostic said, he wouldn't have had to refinance his house. He still would have a low interest rate, a good credit rating, his small business and enough money to take vacations every year.

"We haven't done anything directly, that I can see, to put us in this situation," Bostic said. "A gall bladder gets punctured, and everything richochets from there."

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