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.”
And I share Mr. Zandi’s fear, as well as worry that it will decrease confidence while simultaneously increasing costs—a blow that hard-working Americans simply can not afford to absorb in this weakened economy. Rather than creating more affordable mortgage options, it produces the opposite effect—putting millions of homeowners or potential buyers at greater risk of an unstable credit and housing market and sustaining inflated interest rates for the future.
Only weeks ago, President Obama introduced a $275-billion housing plan to refinance high loan-to-value mortgages, pay lenders and services to make loan modifications, and subsidize struggling homeowners—even those who may have committed mortgage fraud. In my opinion, his plan has serious flaws. For instance, it includes no firewalls to ensure people will not choose bankruptcy over loan modifications. Congressional Democrats’ cramdown bill would almost ensure that outcome.
Some in Congress question the Democrat leadership’s cramdown approach. They wonder why we wouldn’t make it a measure of absolute last resort. Why we wouldn’t apply it only to truly risky mortgages. Why we wouldn’t require some proof that the borrower was truthful when he applied for the mortgage he wants a judge to rewrite. They even wonder why we wouldn’t require some advance warning to lenders before running into court – an opportunity to allow voluntary negotiations to proceed.
These are perfectly legitimate questions that should be answered before the Congress continues to proceed with its “let’s see what sticks” approach to the economy. Not to mention the basic questions about fairness raised by this bill. Is it fair to reward the poor decisions of some when others – namely the ones who will foot the bill for their neighbors’ poor decisions – have been cautious and prudent? A recent Rasmussen poll showed that 76% of Americans are not willing to pay higher taxes to help people who cannot afford to pay their mortgage on time. And, Rick Santelli’s spontaneous call for a Chicago Tea Party demonstrated how deep such misgivings run.
Congress passed a $300-billion taxpayer-funded program last summer through which it purported it would assist 400,000 families refinance their mortgages. But with a little over 300 applications in the pipeline, it is clear that this program has been a huge waste of time, energy, money and other taxpayer resources. In fact, this HOPE for Homeowners program has only helped about 25 families actually refinance.
And, Congress has options that could make a real difference. For instance, House Republicans proposed a first-time home-buyers tax credit of $7,500 for those buyers who make a minimum down-payment of 5 percent. This not only provides a positive tax incentive, it also ensures responsible underwriting standards.
House sponsors titled the cramdown bill the Helping Families Save Their Homes Act, but it is more likely to hurt families than help them.
