Loan plan draws critics

Housing prices are falling in Las Vegas, but a proposed federal law could keep the savings from filtering down to consumers, a banking trade group says.

The average housing payment would rise more than $200 a month in Clark County if the law passes Congress, the Mortgage Bankers Association said last week.

The bill would let judges tweak the mortgages of bankrupt homeowners, which would yield uncertainty regarding future asset values and translate into higher risks for bankers, the association said. Covering greater risks would, in turn, require higher down payments, closing costs and interest rates. The association estimates the law would push up interest rates on future mortgages by 1.5 percentage points. That would mean $2,602 more per year, or $217 more per month, on the average Clark County home loan of $217,541.

Some lawyers disputed the association's data.

"It's complete speculation at best," said Jason Naimi, a bankruptcy and real estate attorney with Naimi Law in Las Vegas. "In fact, it's wrong. Banks are suggesting that if this bill is passed, they'll have to charge higher interest rates and require more money down. That's not the case. What (the bill) will do is force mortgage companies to take responsibility for the loans they lend out."

The proposed measure is part of the Emergency Home Ownership and Mortgage Equity Protection Act, which would reform bankruptcy regulations for homeowners. It would allow judges presiding over bankruptcy cases to alter homeowners' mortgage terms, including interest rates, payback periods and principle balances.

The law would amount to a "new tax" on homeowners, said David Kittle, chairman-elect of the Mortgage Bankers Association.

"The last thing homeowners need in this market is higher mortgage payments," Kittle said.

But sticking bankrupt consumers with untenable mortgages would be even worse for the economy, Naimi said. If judges can't refashion home loans, foreclosures will continue to spike. That will force more properties onto the market and further devalue homes, sustaining a cycle that's already shaved about $30,000 off the median local resale price in the past year.

"Banks will end up repossessing more homes," Naimi said. "They'll be in the business of selling real estate, and they don't want that."

Besides, he added, any noticeable gain in monthly payments would price thousands of consumers out of loans, an unlikely policy for banks that need to gin up new business.

Another Las Vegas bankruptcy attorney agreed with the bankers' association's position, though.

Randolph Goldberg said it's difficult to determine exactly how much the federal law would cost lenders, but he acknowledged that letting judges change loan specs would create higher loan risks and require "extra insurance" against the hazard.

Goldberg said he's seen big increases in foreclosures among his clients. He handled about five cases involving foreclosure in the two years before the housing bust, he said; today, he gets 100 filings a month involving mortgage defaults. Still, he said, he doesn't believe judges should be able to convert mortgages, just as they can't change the rules on other loans.

"It's giving (judges) too much power," Goldberg said.

Goldberg would make an exception for cases of "egregious" mortgages with "obscene" interest rates of 10 percent or more. But in cases without lender abuse, letting judges change mortgages could encourage homeowners who want lower payments to file for bankruptcy just to see if they can convince the court to reduce monthly fees.

"And even if you knock it down to a prime loan, most people still couldn't afford it anyway," Goldberg said.

For now, the bankers' association is urging consumers who face foreclosure to skip bankruptcy and contact their lender to renegotiate loan terms directly. Mortgage bankers modified payback plans for more than 250,000 people in the third quarter, Gustafson said.

"Lenders are very interested in keeping viable homeowners in houses," Gustafson said.

Two versions of bankruptcy reform are making their way through Congress. The Senate's bill would apply to all types of home loans, while the House's proposal would affect only subprime mortgages.

The bankers' association based its analysis on the Senate bill.

Federal laws prohibit lenders from overcharging borrowers for risk, but Gustafson said the threshold for triggering rules against excessive fees is between 3 percent and 4 percent. The estimated pass-along rate of 1.5 percent would be legal, he said.

Contact reporter Jennifer Robison at jrobison@reviewjournal.com or (702) 380-4512.