McLeod Law Offices

According to a study released by the Georgetown Law Center, “there would be ‘no or little’ impact on home-mortgage interest rates if Congress moves ahead with pending legislation — H.R. 3609, The Emergency Home Ownership and Mortgage Equity Protection Act of 2007) and Senate (S.2136, The Helping Families Save Their Homes in Bankruptcy Act of 2007) – designed to ease the U.S. mortgage foreclosure crisis by allowing modifications in bankruptcy proceedings.”

The study was conducted by Adam J. Levitin, Associate Law Professor at the Georgetown University Law Center and Joshua Goodman, Ph.D. in Economics candidate at Columbia University. It is entitled “The Effect of Bankruptcy Strip-Down on Mortgage Interest Rates.” From today’s press release:

There is no empirical evidence that supports a conclusion that permitting either strip-down or other forms of modification of principal home mortgage loans in bankruptcy would have more than a minor impact on mortgage interest rates or on home ownership rates. As there is significant evidence that mortgage interest rate markets are indifferent to bankruptcy modification risk, we conclude that permitting unlimited strip-down would have no or little effect overall on mortgage interest rates

Addressing MBA claims that mortgage interest rates will shoot up if Congress acts to address the mortgage foreclosure crisis, the Levitin/Goodman study concludes: “… statistically there is a zero percent chance that the MBA’s 150 basis point claim is correct. All empirical and market observational data indicates that that MBA’s claim of an effective 150-200 basis point increase from allowing strip-down is groundless. The empirical evidence indicates that there is unlikely to be anything more than a de minimis effect on interest rates as a result of permitting bankruptcy modification.

The Levitin/Goodman study continues: “The Mortgage Bankers Association (MBA) has claimed that permitting modification of mortgages in bankruptcy will result in an effective 200 basis point increase in interest rates on single-family owner-occupied properties… Our research on current mortgage interest rate spreads among different property types disproves the MBA’s claim. …More recent MBA press releases have claimed only an increase of 150 basis points, without explaining the 50 basis point decline from the 200 basis point figure featured in Congressional testimony.

Commenting on the study findings, Levitin said: “The overwhelming thrust of the historical analysis is that the effect of permitting strip-down on mortgage interest rates would be either nonexistent or quite small — nothing near the range suggested by the Mortgage Bankers Association. We explain the lack of market sensitivity to strip-down risk by reference to two sets of consumer bankruptcy data, one from 2001 and one from 2007, both of which suggests that lenders’ losses in strip-down would be extremely limited both in scope and magnitude and often total less than those they would incur in foreclosure.

The study findings indicate that the nature of the pending U.S. House and Senate bills make it even less likely that there will be interest-rate implications if Congress acts: “First, to the extent our findings are used as a guide for predicting the impact of pending legislation, it is important to note that both our current and historical data analysis is of the impact of an unlimited strip-down regime on certain property types. The proposed legislation in the House (H.R. 3609 with the Conyers-Chabot Compromise Amendment) and the Senate (S. 2136) do not propose such an unlimited regime for single-family principal residence mortgages. Instead, both bills would impose a variety of limitations on modification. Both bills would impose eligibility requirements in the form of a strict means test, limiting relief to those homeowners whose income is insufficient, after deducting modest living expenses allowed by the IRS, to cover their mortgage obligations. Both bills would also limit relief to subprime and nontraditional mortgage products. Moreover, for interest rate modifications, both the House and Senate bills set a floor for modifications of the market rate for 30-year conforming mortgages plus a risk-premium. The House bill would further limit relief to mortgages made between January 1, 2007 and its effective date, and has a seven-year sunset provision. Because of these proposed limitations, the pending legislation would likely have an even smaller impact than the unlimited strip-down regime we tested in our study.