It’s only been a day since President Barack Obama released his plan to deal with the foreclosure crisis, but conservatives have already amped up their opposition. One facet of the plan in particular — a provision allowing bankruptcy judges to “cram-down” mortgage payments for troubled homeowners — has drawn the ire of conservative lawmakers.
Yesterday, Rep. Dan Lungren (R-CA) said the provision is “going to affect future mortgages, because that’s going to put an additional risk premium on all mortgages,” while Sen. Jon Kyl (R-AZ) claimed “this is going to raise rates for everyone else because banks have to cover the risk.” Watch it:
Rep. John Boehner (R-OH) circulated a similar statement, asking “should a responsible plan include a ‘cramdown’ provision that could increase the monthly mortgage payments for responsible borrowers?” The conservative argument is that banks will be so wary of cram-downs occurring, they will make it increasingly difficult for borrowers to obtain mortgages.
Changing bankruptcy law to allow cram-downs is the only part of Obama’s plan that requires Congressional approval. As such, it’s important to note the real reason for conservative fearmongering: the banking industry hates cram-downs. As BusinessWeek reported, conservatives are getting their argument straight from the Mortgage Bankers Association (MBA):
[B]anking lobbyists launched a renewed attack on the cramdown legislation, enlisting as an ally Republican Representative Lamar Smith of Texas, among others. [MBA] is distributing talking points to key congressional aides laying out reasons why “Congress should defeat bankruptcy reform legislation.” These include the argument that if lenders can’t be confident that loan terms will survive, they will raise rates and reject riskier borrowers.
The MBA’s “cram-down issue brief” contains the following: “If [cram-downs] were to happen, the mortgage market will have no choice but to respond by pricing this new risk into the cost of mortgages through higher rates, fees and down payments on all consumers.” For the record, in his career, Boehner has received $481,319 from the banking industry; $145,950 in the 2008 election cycle alone. Lungren has received $67,500, while Smith received $145,868.
As for the conservatives’ alleged concern, there shouldn’t be a rush for homeowners to enter bankruptcy, as “sane people don’t subject themselves to Chapter 13 unless they have no alternative.” Indeed, as Henry Hildebrand, a Chapter 13 trustee in Nashville pointed out, “[homeowners in bankruptcy] have to live under the supervision of a trustee and a judge, and under the observation of creditors for up to five years.”
So a picnic, bankruptcy is not. But cram-downs can play an important role in solving the housing crisis for those who have, literally, nowhere else to turn. If addressing foreclosures, and not serving the interests of the banking industry, is the focus of the housing plan, cram-downs need to be a part of it.