MBA Responds to Call for Bankruptcy as Foreclosure Solution

MBA (7/10/2008 ) Sorohan, Mike
A letter to the editor of the Raleigh (N.C.) News & Observer prompted a sharp reaction from the Mortgage Bankers Association, which said the writer’s advocacy of bankruptcy legislation as a solution to foreclosure was “conveniently ignoring” the negative consequences of such an action.
The writer, Raleigh attorney Jerry Hartzell, wrote the July 2 letter calling on Congress to revisit legislation that would insert language permitting bankruptcy judges to modify the terms of a primary mortgage. Such legislation, strongly opposed by MBA and other industry trade groups, has failed twice in Congress this year.

Hartzell, who freely cited statistics from the Center for Responsible Lending—a group that MBA has fundamentally disagreed with on a number of issues, citing such data as “faulty” and “fundamentally flawed”—accused the mortgage industry of being the “culprit” in the current lending crisis and calling the HOPE NOW Alliance, of which MBA is a founding member, of engaging in an “anemic response” to assist borrowers.

“Chicken Little was correct and the sky really was falling, Chicken Little should at least gain some credibility,” wrote Hartzell, who conducts foreclosure workshops on behalf of the North Carolina Association of Trial Lawyers and the North Carolina Bar Association Foundation. “Or, to put a point on it, those who dismissed the warnings with imperious condescension should be recognized for the disingenuous spin doctors that they are.

In response, MBA Chairman-Elect David Kittle, CMB, sent a letter published this week in the News & Observer noting that Hartzell’s letter “conveniently” ignores the negative consequences of bankruptcy to consumers.

“There are reasons why Congress has wisely rejected [such legislation] twice,” Kittle wrote. “Bankruptcy puts a 10-year black mark on one's credit—credit that will be needed in the future to purchase automobiles, insurance, homes, even get a job or rent a home. Further, it would increase the cost of mortgages for all future borrowers by at least 1.5 points. For average homeowners in Wake County, this would add $1,900 a year to their mortgage.”

Kittle noted that should such legislation pass, trial lawyers would stand to gain the most. “Bankruptcy attorneys get paid whether the bankruptcy succeeds or fails (and two- thirds do fail),” Kittle wrote. “Advocates claim 600,000 people could file for bankruptcy under this proposal. At an average of $3,000 per filing, that's a $1.8 billion windfall for bankruptcy attorneys.”

Kittle also defended the efforts of HOPE NOW, noting that it and other industry-led responses have helped 1.7 million homeowners with loan workouts since July 2007, including nearly 38,000 in North Carolina alone.

“There is no quick-fix solution to the housing crisis, but a radical solution such as bankruptcy will only exacerbate the problem,” Kittle wrote.

Kittle received supportive comments from another letter to the News & Observer, from North Carolina State University Associate Professor of Finance Richard Warr, who said Hartzell was “wrong to say that the mortgage industry is entirely to blame” for the housing slump.

“Hartzell's proposal that bankruptcy laws be extended to homeowners in default is fine, but only for new loans,” Warr wrote. “Applying it retroactively is forcing a renegotiation of a contract that was freely made in the absence of such laws. Changing the terms is, in most cases, impossible because these loans have been securitized and sold off.”

“At the end of the day you can't expect to live in a house you can't afford at a reduced cost with the potential of a large return and not face some risk—markets just don't work like that. Hartzell would do well to appreciate that fact,” Warr added.