Why Bankrupcty Bill Would Be Bad For Housing Industry

Let's hope the bankruptcy provision in H.R. 1106, The Helping Families Save Homes Act, does not pass as presented. If so, the credit tightening the mortgage industry has experienced over the past year would worsen, making home ownership more difficult.

While the bill may have good intentions ( because we all know a politician would never present something to only make himself look good) there are too many problems with this bill. Obviously, the intent is to help struggling homeowners stay afloat, and to keep our sagging economy and housing industry from taking more of a hit, but this bill would actually hurt potential home buyers.

The primary concern is the provision allowing judicial modifications to be made by the bankruptcy judge, allowing the judge to arbitrarily make changes to the original terms of the mortgage: i.e., lower the remaining balance, lower the interest rate. While your first reaction may be, "Great", let me point out the downside.

If you have applied for a mortgage in the past 6-8 months, you have noticed the increased documentation requirements, higher credit score requirements, and lower loan-t0-value availability. Guess what? If H.R. 1106 were to pass as submitted, it would get worse. The capitol markets, which provide funding for mortgage loans, would become so restrictive, it would not surprise me for minimum down payment requirements to be 20% or more and minimum credit scores to be 700 or higher.

Doesn't sound so great, does it? Think of it this way, would you want to lend your money if someone could come in and modify the terms? See why even a large down payment still may not help? If a judge could come in a lower the balance, the once "large down payment" would disappear.

The mortgage bankers association is working hard to help legislators understand the negative impact this bill could have. In fact, earlier this week, The House pulled the bill, sending it back for revisions.

Let's hope cooler heads prevail and this bill does not pass as presented.

Click here to read more about the bill.