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Enduring Today’s Financial Quicksand

January 2008, F&I and Showroom - Feature

by Kelli Wood - Also by this author

Huddled inside a crowded room in the California Science Center in Los Angeles — the epicenter of today’s foreclosure wave — were community leaders, homeowners and lawmakers such as Los Angeles Mayor Antonio Villaraigosa and U.S. Rep. Maxine Waters (D-Los Angeles). All were there to discuss what’s needed to rescue homeowners caught in the subprime mortgage debacle.

“First, with respect to why we’re holding this hearing, it would arguably be derelict of this subcommittee not to hold a hearing regarding the subprime mortgage market on the home foreclosure crisis,” said Waters, who acts as chairwoman of the Financial Services Subcommittee on Housing and Community Opportunity. “This issue is not only the biggest story in the housing world that this subcommittee operates in daily; it is currently the biggest economic story in the nation and perhaps the world.”

The Nov. 30 Congressional field hearing on mortgage foreclosure prevention and intervention represents one of many discussions taking place throughout the country, with lawmakers looking to bailout distressed consumers through legislation. These proposals are what have finance companies, including those serving the auto industry, concerned.

“I think the mortgage bankruptcy bills would have a negative impact on the housing market, the economy, as well as lenders who made the loans,” said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable. “If enacted, they could impact the overall health and strength of lending companies, which could trickle down to the auto industry.”

Talbott’s organization joined 13 other groups, including the Consumer Bankers Association (CBA) and the Mortgage Bankers Association (MBA), in writing a letter to the House Judiciary Committee in opposition to one of the bills, titled H.R. 3609. They say the bill is an overly broad response to the problem in the subprime mortgage market that could have unintended and adverse consequences for consumers.

At Waters’ hearing was U.S. Rep. Linda Sanchez (D-Calif.), who is championing the bill Talbott and the 13 organizations oppose. Called the Emergency Home Ownership and Mortgage Equity Protection Act, it would give bankruptcy judges the authority to alter mortgage terms, possibly reducing the size of home loans for those people at risk of going into foreclosure. Sanchez claims the legislation could reduce the number of foreclosures in the next few years by about 500,000.

The House Judiciary Committee was expected to meet on Dec. 12 to discuss a possible compromise between Sanchez and proponents of her bill. Results did not make F&I’s January press deadline.

“Lenders are nervous, so they are looking at the worst-case scenario,” Sanchez explained. “But this legislation would give bankruptcy judges the power to do what lenders have said they will do. Less than 1 percent of loans have been modified, but now lenders recognize that there is a need to change this.”

GMAC joined 20 other companies, including Capital One and HSBC, in signing a second letter in opposition to Sanchez’s bill. They contend that Sanchez’s legislation would lead to increased interest rates to offset the reduced balance on unpaid loans. This, GMAC spokesman Michael Stoller said, would push more consumers into higher-risk categories.

“It’s important to help people,” he said, “but altering the bankruptcy codes is not the best way to do it.”

The American Bankruptcy Institute (ABI) agreed, and expressed doubt that the bill’s supporters realize the consequences that may result, specifically a spike in bankruptcy filings that courts may not be prepared to accommodate.

“Chapter 13s could spike to record levels if Congress enacts pending legislation to allow homeowners to rewrite their mortgages by filing for bankruptcy,” wrote ABI Executive Director Samuel J. Gerdano in a recent release.

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