Sherrie Floyd says she was able to handle the first reset on the $505,000 mortgage she had taken out to refinance her Vallejo, Calif., home. And the second.
But this month, when the mortgage reset for the third time -- driving her monthly payment to more than $4,300 on a home worth about $470,000 -- she told the judge overseeing her and her husband's bankruptcy case that they would have to abandon the place unless their lender agreed to modify their loan.
That doesn't appear likely.
"We applied four times for a loan modification," said Floyd, 44, who has a clerical job with the Kaiser Foundation. "They told me there was nothing they could think of that we could afford."
The Floyds might have been helped by a congressional proposal to allow bankruptcy judges to approve modifications of home mortgages to stave off foreclosure. But that measure has been derailed amid fierce opposition from lenders, and even supporters concede that it is unlikely to win approval this year.
The Mortgage Bankers Assn., which spearheaded the Capitol Hill campaign, claimed that the bankruptcy measure would drive up the costs of all new residential mortgages by as much as 2 percentage points. That would be a major hit: A change from 6% to 8% on a $300,000 30-year fixed-rate mortgage would raise the payment by $402 a month, or nearly $5,000 a year.
But that claim has come under fire by critics who say the MBA cherry-picked data to paint a bleak picture of sharply higher mortgage rates. The association also misquoted a study by the nonpartisan Congressional Budget Office in a way that made it seem that the CBO supported its position against the bill.
In "talking points" posted on its website, the MBA cited a finding in January by the CBO that the consequence of the bankruptcy proposal "would be higher mortgage interest rates."
In fact, the CBO analysis states that there "could be" higher rates, and qualifies that even further by noting that the size of any increase "is difficult to predict and could depend on the exact change in policy."
The MBA removed the document with the misquotation from its website after it was questioned by The Times, and later posted a corrected version.
CBO Director Peter Orszag later told Rep. Brad Miller (D-N.C.), one of the bill's sponsors, that amending the bill to restrict it to existing mortgages only -- a change that was subsequently made -- "would attenuate any possible effect on mortgage rates."
A recent study by two academics, Adam Levitin of Georgetown Law School and Joshua Goodman of Columbia University, suggests that the MBA's figures on interest rates inflated the threat.
The researchers found there was virtually no difference in rates quoted by a sample of leading mortgage lenders for single-family houses and vacation homes and multifamily dwellings -- even though mortgages on the latter two can be modified in bankruptcy.
The only consistent discrepancy they found was between the rates charged on single-family homes and investment properties. But investment properties, Levitin notes, contain other risks, including the greater likelihood that investors will walk away from properties whose values fall below their loan balances, that would explain the difference.
Levitin says the findings show that there's no reason to think mortgage lenders would take the threat of bankruptcy into consideration when setting loan terms for primary residences. Lawmakers have also modified their proposal so that it would apply only to sub-prime and other risky mortgages issued from Jan. 1, 2000, to the date of enactment -- further limiting its effect on the overall market.
"I don't know how much more narrowly you can draw the provision," said Alan M. White, a bankruptcy specialist at Valparaiso University School of Law. "It's really aimed at people who want to pay their mortgages."
Francis Creighton of the MBA contends that even a limited change in bankruptcy law now would open the door to further modifications, undermining lenders' confidence in the reliability of their loans and driving up rates to compensate.
That argument became one of the key talking points for opponents to the proposal.
"This will put up barriers -- maybe unintended barriers, but real barriers, the experts tell us -- to the American dream of owning a home," Sen. Charles E. Grassley (R-Iowa) said this month during Senate debate on a housing stimulus package.
Mark S. Scarberry, a bankruptcy expert at Pepperdine Law School, said, "To allow a mortgage holder to force modification on a lender is a whole new wrinkle."
Scarberry says the costs for lenders might be moderated if the proposals required the modified mortgage to be revalued after five years, and written up to a higher market price if the home has appreciated in that period. That way, he said, "the lender would have some upside."