Cramdown Housing Bill Hurts Families

Without a doubt, our economy is facing a confidence crisis. As the historic plummet of the markets last week demonstrated, Wall Street has little confidence in recovery right now. And, as I hear from constituents every day, so has the public.

Though 92% of mortgage holders continue to pay their mortgages on time, they worry about joining the growing ranks of the unemployed, recovering their savings, and making the next mortgage payment. The doom and gloom reporting from mainstream media and speechifying from Washington figureheads has the potential to be a self-fulfilling prophecy, pulling us down deeper into the spiral instead of lifting us out of it. As former President Bill Clinton advised current President Obama: America’s leaders must project optimism in the face of today’s uncertainty.

And, that would be good advice for President Obama’s friends in Congress as well. Last week, the House passed mortgage cramdown legislation – a seriously misguided bill that will actually add more instability and uncertainty to the housing market.

Under the current system, it is in the best interest of both borrowers and lenders to rework mortgage terms to prevent foreclosures. Lenders want to be repaid and borrowers want to stay in their homes. Cramdown removes incentives for struggling borrowers to rework the mortgage terms with the lenders since they could simply go to a bankruptcy judge and get a cheaper deal. Under the bill, a judge would virtually have carte blanche to wipe out part of their principal, reduce their interest rate, and stretch out the term of their mortgage.

Eventually someone will have to pay for it. Sadly, it will hurt the very same people this legislation is supposed to assist—middle-income homeowners. Allowing bankruptcy judges – who will certainly see an increased caseload under this law – to permanently reduce the principal owed on mortgages for primary residences, reduce interest rates, and adjust the mortgage terms at whim could result in a 2% increase on interest rates for all homebuyers as lenders increase their rates to compensate for such unpredictable risks.

Officials at the Federal Reserve and the Federal Housing Finance Agency have raised real concerns about whether giving bankruptcy judges the power to modify home loans could discourage fresh investment in that sector. Moody’s Economy’s chief economist, Mark Zandi, is reported in Dow Jones Newswires as saying that “tinkering with the bankruptcy code could lead to unpredictable results.”

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Date published: Mar 11, 2009


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