January 20th, 2009 12:30 PM by Lehel Szucs
Citigroup Deal May Push All Mortgage Rates Higher
Monday, January 12, 2009 - By Staff Writer, Originator Times
STUART, FL – Last week, Democratic law makers and Citigroup reached a deal that will allow bankruptcy judges the power to reduce principle amounts on loans to help borrowers avoid foreclosure, also known as a “cram-down.”
Industry trade groups including the American Bankers Association (ABA) and the Mortgage Bankers Association (MBA) said the proposal to give bankruptcy judges broad authority to modify mortgage terms could make home loans more expensive.
The deal amounts to an about-face of Citigroup’s prior position and left many industry veterans speculating that the change in Citigroup’s position is directly linked to the $45 billion bailout that the company is slated to receive.
"We remain opposed to bankruptcy cram down legislation because of the destabilizing effect it will have on an already turbulent mortgage market,” said the MBA in a released statement. “We were surprised by the suddenness of the announcement and are still evaluating the proposed deal, but we believe there remain a number of crucial issues that need to be addressed.
"Any agreement needs to protect FHA and VA guarantee programs. Today's announced agreement does nothing to solve that important issue. In addition we believe that this legislation ought to be limited only to subprime loans. We would also want to see a sunset date that limits how long judges would be granted this extraordinary power.
"This legislation would have a significant effect on the mortgage markets and we believe it ought to be subject to the normal legislative process, including hearings and markup.”
David G. Kittle, CMB, Chairman of the MBA has stated previously that is cram-downs are enacted it may cause rates to increase up to two percentage points.
In a prior testimony before congress on proposed cram-down legislation, Kittle maintained that reforming the bankruptcy code to allow judges to “cram-down” debt on primary residential mortgages will impose significant costs on consumers by restricting the flow of capital into the mortgage market and increasing the price tag on all mortgages.
“If you chip away at the security created on home mortgages–and this bill is not a small chip, it is a sledgehammer attack—you chip away at the entire core of the mortgage finance system,” said Kittle. “In order to account for the added risk you will add significant costs to obtaining a mortgage. If this bill becomes law, we believe mortgage rates would jump significantly, going up 1½ to 2 points for everyone taking out a loan.”
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