Judges Need Power To Stem Foreclosure Flood By WILLIAM BREE

By WILLIAM BREETZ and RONALD VAN WINKLE
January 4, 2009

Washington has worked overtime to rescue Wall Street, but has done little to help homeowners caught in the mortgage mess, the crisis that started our economic crash.

It is likely to get worse. In 2008, a record 1.6 million homeowners lost their homes to foreclosure. In 2009, an estimated 2 million more homeowners will lose their homes. Ten percent of all home borrowers — and fully a third of subprime borrowers — are now at least one month behind in their mortgage payments.

Foreclosures depress the housing market, leading to more foreclosures, and are expensive for everyone, including lenders. The lender in a forced sale commonly nets only 50 to 65 percent of the real value of the property. The costs imposed on the borrower, of course, are ruinous, to say nothing of the costs to local governments and neighboring owners.

Some 12 million homeowners are upside down on their mortgages — they owe more on the mortgage than the home is worth. This, of course, makes it impossible to refinance their mortgage to take advantage of today's lower mortgage rates. Borrowers and lenders could voluntarily work out a compromise, but subprime mortgage holders often insist on foreclosure.

If Congress won't address the foreclosure problem, it should let the states solve it. If Congress gave its consent — a Constitutional requirement when the terms of contracts are altered — state judges could change the terms of a good number of mortgages to keep owners in their homes.

And in states where foreclosures occur without a judge involved, Congress could simply grant every borrower the right to transfer the matter to court, where a judge could supervise it.

Here's what a judge might do after a foreclosure was filed:

First, order an appraisal of the house's worth in today's market — a real appraisal, not an inflated appraisal like the ones that prevailed when subprime mortgages were being written.

Next, require the homeowner to prove that the family has enough income to afford a mortgage. The monthly mortgage payment should not exceed 38 percent of a family's monthly income, because that is what most economists and the federal government suggest is the maximum that should be devoted to housing costs.

Third, do a simple calculation. Ask whether a monthly payment of 38 percent of the homeowner's income would be enough to pay the first lender at least 100 percent of the house's current value, plus interest, if the mortgage ran for 30 years and the borrower was paying the 30-year fixed interest rate offered by, say, Fannie Mae.

If the judge concluded that the borrower couldn't afford to pay the lender at least what the house is worth today, even on these favorable terms, then the foreclosure should go forward.

But if a borrower could afford these terms, this plan would allow the borrower's family to keep their home. The judge could order that the homeowner's first mortgage be changed to reflect these terms, and foreclosure could be avoided, even if the lender objected.

Any second mortgages on the property — common in subprime transactions — need not be wiped out, as they would be when a first mortgage is foreclosed. They could be restructured instead, as happens in bankruptcy court, with payment deferred until the house is sold.

What would happen to the difference between the current market value of the house and the original amount the owner borrowed? That difference could be written into a second note and paid to the lender when the house is eventually sold, if the house's value increases.

Sadly, even with such a plan, history tells us that fewer than half of defaulting homeowners — many beset by job loss, divorce or illness — will avoid foreclosure.

Nonetheless, we believe writing down the mortgage to market value and repaying it on those terms will work for many homeowners and most lenders.

Some other legal issues would have to be resolved, but the main point is this: State judges who hear foreclosure actions every day are in the best position to fix this mortgage mess. Until Congress authorizes them to do it, struggling homeowners will continue to suffer the worst real estate crash since the Depression.

source: http://ww w.courant.com/news/opinion/commentary/hc-commentarybreetz0104.artjan04,0,6904555.story