Mortgage Default, Foreclosures and Bankruptcy - UC San Diego
Bankruptcy and The Mortgage Crisismiwhite/NCBJ-talk.pdf · loan modifications/encourage...
Transcript of Bankruptcy and The Mortgage Crisismiwhite/NCBJ-talk.pdf · loan modifications/encourage...
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Bankruptcy and The Mortgage Crisis:
New Research
Bankruptcy and The Mortgage Crisis:
New Research
PRESENTER
•Michelle J. WhiteProfessor of EconomicsProfessor of EconomicsUniversity of California, San Diego
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Bankruptcy filings, mortgage defaults and foreclosures are closely related
Bankruptcy filings, mortgage defaults and foreclosures are closely related
• BAPCPA caused bankruptcies to fall and defaults to rise:
– 3% for prime mortgages and
– 14% for subprime mortgages. – 14% for subprime mortgages.
• In general, more bankruptcies mean more mortgage defaults. Also more bankruptcies mean more foreclosures.
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Foreclosures have very high costs: Foreclosures have very high costs:
• Ex-homeowners must relocate, neighborhood ties lost, kids must switch schools.
• Renters must also move.
• Some become homeless. • Some become homeless.
• Vacancies cause blight.
• Cities cut public services because taxes fall.
• Foreclosures cause more foreclosures.
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Lenders foreclose too oftenLenders foreclose too often
• Lenders lose 1/3 to ½ of their investment.
• But because lenders don’t bear all the costs, they foreclose too often.costs, they foreclose too often.
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Government Programs to Reduce ForeclosuresGovernment Programs to Reduce Foreclosures
• By encouraging lenders to modify mortgages instead of foreclosing.
• Obama Admin “Help for Homeowners” program: • Obama Admin “Help for Homeowners” program:
– 500,000 mortgages have started the modification process.
– Only a few thousand have permanent modifications.
• But lenders have to agree to mods.
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Why so few modifications? Why so few modifications?
• “Pooling and servicing agreements” discourage loan modifications/encourage foreclosures.
• Lenders lose if they modify mortgages:
– 30% of mortgage defaults “self-cure” and – 30% of mortgage defaults “self-cure” and
– 30% - 45% re-default within 6 months,
So lenders prefer foreclosure and resist modifications. Admin programs are unsuccessful because lenders can veto.
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Does bankruptcy help homeowners? Does bankruptcy help homeowners?
• Chapter 13 helps homeowners save their homes, but it’s not very effective.
• Only 1% of homeowners in Ch 13 save their homes when they otherwise would have lost homes when they otherwise would have lost them.
• Ch 13 is even less effective now, since lower home values mean fewer homeowners want to save their homes.
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What about introducing cram-down of mortgages in Chapter 13?
What about introducing cram-down of mortgages in Chapter 13?
• This would prevent lenders from vetoing modifications, so more would occur.
• Average reduction in mortgage payments if • Average reduction in mortgage payments if underwater mortgages are cut to current market value is $150,000 over the life of the mortgage.
• This would cause many homeowners to file Chapter 13’s, even if they can afford to repay.
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Policy DilemmaPolicy Dilemma
• Too few modifications occur now under government programs, because lenders must agree.
• But too many modifications would occur if • But too many modifications would occur if cram-down in bankruptcy were introduced, because lenders can’t veto.
• Which is better—we don’t know!