Credit Suise Study: Bankruptcy Mortgage Modification Bill will cut foreclosures 20 percent

Credit Suisse came out with a new study finding that if the mortgage modification in bankruptcy bill passes, it would cut foreclosures by 20%.

WASHINGTON (Reuters) - A plan to let bankruptcy judges erase some mortgage debt will help lower foreclosures by 20 percent and stabilize the troubled housing market, a Credit Suisse report concluded on Monday.

The possibility that judges could lower, or 'cram down,' a loan amount will give mortgage companies an incentive to modify more failing loans on their own, the investment bank's researchers said.

"We expect the new bankruptcy reform will increase loan mods, particularly principal reduction mods, as it is likely to both pressure and also give justification to servicers to more actively pursue principal reduction mods," the report from Credit Suisse Fixed Income Research stated.

A two-year-old housing downturn has pushed foreclosures to record levels as more families struggle to make payments on properties that are slipping in value.

Many of those sour loans were bundled by Wall Street into complex securities that are difficult to modify.

Advocates for mortgage "cram-down" argue that bankruptcy judges are uniquely able to cut through mortgage contracts and rewrite loan terms.

Late last week, Democratic leaders who control the White House and Capitol Hill agreed to push a cram-down bill early this year.

"A large percentage of delinquent borrowers could benefit from cram downs," the report states. "We expect the bankruptcy plan will provide about a 20 percent reduction in foreclosures."

A separate report on Monday warned that redrafting bankruptcy rules could scare more lenders away from the housing market and damage banks that specialize in mortgage second-liens.

"(Cram-downs) will create long-term problems for the housing market through higher mortgage rates and reduced affordability, which will likely further destabilize home values and wreak havoc on second-lien and consumer lenders," the report from Friedman, Billings, Ramsey & Co said.

Second-lien holders would likely be wiped out by a bankruptcy judge, the report concludes, and lenders that specialized in those loans will be hurt.

Many troubled consumers will be enticed by the possibility of getting relief through the courts, and increased bankruptcy filings will mean more write-offs across the sector, the investment bank stated.

"A spike in bankruptcy filings would also cause a surge in credit card losses, as lenders are required to charge off the account upon receipt of the bankruptcy notice," the report states.

(Reporting by Patrick Rucker; Editing by Kenneth Barry)

JP Morgan Chase Analysts Admit Mortgage Modification Bill a "Necessary Evil"

In this article, JP Morgan Chase analysts admitted that the proposed bankruptcy legislation would stabilize home values through decreased foreclosures.

However, the bill may be "a necessary evil," JPMorgan Securities analysts said, and others agreed. Allowing bankruptcy cram-downs would force servicers to use principal forgiveness with loan modifications. "In the long run, cram-downs can help stabilize home prices through reducing distressed sales," the analysts said.

Indeed, while redefaults remain high - a generic 25% payment reduction results in a 50% redefault rate - a 25% balance reduction, which is the type of modification a cram-down would accomplish, makes for a lower 30% redefault rate, according to Merrill Lynch data.

This may ultimately be a better alternative for bond holders as compared with the growing number of defaults and foreclosures, which is where the trend line is going, Telpner said. He pointed out that these modifications could stabilize assets in the pool even if investors are getting paid less on the dollar. "For some ABS pools, cram-downs may provide greater recovery because they serve as an alternative to writing off an increasingly large portion of the pool," he said.

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Citigroup's Letter

This is a link to the letter sent by Citigroup stating that they will support the Helping Families Save Their Homes in Bankruptcy Act of 2009. The letter states that with three modifications, Citigroup supports the "swift passage" of the legislation with those changes. The changes requested are as follows: (1) mortgage modifications limited to loans made before date of enactment, (2) TILA provision in bill would only apply to claims where debtor has right to rescission (won't apply to most debtors anyway), and (3) debtor must contact lender to attempt to modify before bankruptcy is filed. Regarding the last item, I understand that this provision will not apply if a foreclosure is scheduled within 30 days after the filing of the bankruptcy.

Citi Backs Bill to Allow Mortgage Modification in Chapter 13

Financial titan Citigroup, Inc. agreed to support a bill that would allow mortgages on personal residences to be modified in Chapter 13. Citigroup is one of the most influential banks in the United States and its support will hold great sway among members of the Congress on both sides of the aisle. With this news, I believe it is now likely that we will get mortgage modification in Chapter 13. The only questions are when and what will it look like?