 The introduction of the democrat-backed Foreclosure Prevention Act of 2008 last Thursday by Senator Harry Reid (D-NV) is generating mounds of fury and criticisms. The bill aims to aid troubled homeowners by allowing bankruptcy judges to reduce mortgage debt and thereby save thousands from foreclosure. Ellen Hornick, an attorney for the Center for Responsible Lending says, "This will help 600,000 households avoid foreclosure this year and next." Essentially, the cram-down would effectively reduce mortgage balances and monthly payments to troubled subprime and non-traditional mortgage borrowers. Although many are applauding the government's action to clean up the mortgage mess, many oppose the cram-down. Opponents argue the Foreclosure Prevent Act will bail out the risky lenders and financially irresponsible borrowers. And many believe that without any consequences, borrowers will continue to make shady loans to subprime borrowers. Furthermore, forgiving debts will transfer risk from borrowers to the debt holders - investors in mortgage backed securities. As a result, interest rates will have to be higher to attract investors. Steve O'Connor, the senior vice president for government affairs at the Mortgage Bankers Association says, "Looking forward, investors will say, 'How do I know this won't happen again, on a larger scale?' Investors have choices in the marketplace and if they see an additional risk, they'll migrate to other securities." O'Conner also claims that the cram-down could add at least one-and-a-half percentage points to everyone's interest rates and therefore add $200/month on a $200k, 30 year-fixed loan. The MBA also says, "By including language to reform bankruptcy and allow judges to modify mortgage contracts, the bill threatens to hurt those it is designed to help. Bankruptcy reform will increase the cost of mortgage credit for all borrowers at a time when we ought to be making it easier, not harder, to get credit. As long as this consumer-unfriendly provision is included, we cannot support the package as a whole." However, despite MBA's opposition, the Foreclosure Prevention Act of 2008 is expected to pass through legislation. A Senate vote on the bill could come as early as this week. Article Sources http://www.dsnews.com/view_story.cfm?id=2076 http://money.cnn.com/2008/02/21/real_estate/cram_downs_coming/index.htm?postversion=2008022113
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