MANDATE WRITE DOWNS OR NOT?

Voluntary write downs.

The battle raging between the law makers and the government is whether to mandate mortgage write downs through bankruptcy or let the market set the property values. The last salvo was fired by Hud: the proposal aims at giving the lenders the option to write down mortgages that are under water up down to 90% of the balance and refinance these loans through FHA SECURE. The lenders who write down mortgages may then place a junior lien against the property. If the owner sells the property at a higher price, the lender recoups his write down. The goal is to recognize current market values, stop foreclosures and keep people in their homes.

Let the Judge decide in bankruptcy.

This proposal that has so far failed to gain traction would let a judge decide what the loan amount will be when the owner files for bankruptcy, just like any other debt. Again, the objective is to keep people from carrying mortgages that exceed the current market value of their homes. This is a forced write down, except that in this case, the lenders do not have a junior lien and the loss is final. If the market recovers and the owner makes a profit from the sale, he will keep all of it.

High loan costs for all.

If lenders are forced to through the bankruptcy process to write down loans, they will most likely hesitate to make new loans to borrowers and, they will also want to recoup their losses by charging higher fees on new loans. They may decide to curtail lending and this will hurt the housing market even more.

Voice your opinion.

Let us know what you think should be done to address the housing crisis. Which option do you think is best? Use the comment box below to voice your opinion. We will publish all comments in our next articles.