Two Percent Rate Raise For All Home Loans When Proposed Legislation Passes
WASHINGTON, D.C. – Industry leaders are in an uproar about legislation that could have devastating effects for the real estate world. The proposed bill they fear was intended to help homeowners in foreclosure, but if enacted, the bill may drive up interest rates by as much as 2% for homebuyers – dissuading new buyers from even entering the market and ushering in dark times for an industry that’s already weathered its share of storms.
H.R. 3609, the Emergency Home Ownership and Mortgage Equity Protection Act of 2007. H.R. 3609 would allow judges under Chapter 13 bankruptcy proceedings to unilaterally mark down the value of a primary mortgage from its full amount down to the fair market value of the home. The bill would also give judges free reign to change the other terms of the loan, including the interest rate or the length of the loan.
The intent is to ease the burden for those in foreclosure and help many keep their homes. However, these good intentions may simply transfer the financial burden from those facing or in foreclosure to everyone that falls outside of that group.
David G. Kittle, CMB, Chairman-elect of the Mortgage Bankers Association testified this week before the House Judiciary Committee’s Subcommittee on Commercial and Administrative Law. In his testimony, Kittle told the committee that proposed legislation to reform the bankruptcy code and allow judges to “cramdown” 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.”
“What does that mean?” asked Kittle. “Assume you take out a 30 year fixed rate mortgage loan for $300,000 in today’s market. If you are a prime borrower you will receive a rate of about 6% with no points, giving you a principal and interest payment of about $1800 per month.”
“If you pass this bill we estimate that the same loan with the same terms could cost as much as 8%,” continued Kittle. “That increases your payment to about $2,200 per month. This will be an increase of $400 per month, $4,800 per year, for a total of over $144,000 over the life of the loan. This is a massive back-door tax increase on homeowners.”