02.01.2009 0

Editorial: Bankruptcy Cram Down a Hard Sell

  • On: 02/23/2009 10:24:52
  • In: Barack Obama
  • An Obama Administration proposal to cram down mortgages—which would allow bankruptcy judges to reduce the amount of mortgages—could be voted upon as early as this week, according to the February 20th edition of the Washington Post. The move comes as critical details of the Administration’s plan are pieced together by White House officials and Congressional leaders, and will mark the first legislative touchstone of President Obama and Treasury Secretary Tim Geithner’s $2.8 trillion bank bailout plan.

    According to top Capitol Hill sources, the changes in legislation could be attached to the $410 billion continuing resolution which will be voted on this week or next, presumably to ensure easier passage for an otherwise controversial measure. And while passage in the House for the bankruptcy provisions appears all but certain, conservative members there, as well as the Senate, will still have to attach their names to allowing bankruptcy judges to interfere with foreclosure proceedings for a very limited number of delinquent borrowers.

    This is an idea that has failed in Congress time and again. Just last year, very similar provisions were floated but never implemented last year in the midst of the presidential campaign. And as noted in the September 24th edition of the Wall Street Journal, such a plan comes with great costs: “[S]ince taxpayers are increasingly now the lenders in these transactions, it will simply increase the cost… The pain may be even more acute for those hoping to buy a home, if markets logically respond by setting mortgage interest rates closer to those on, for example, auto loans or credit cards. A bankruptcy judge is now free to reduce amounts owed on many types of consumer debt. For mortgages, the iron-clad requirement to pay off the loan or lose the house is precisely to encourage lower rates on a less risky investment.”

    Unsatisfied with a system that has served the housing market and aspiring homeowners alike, Mr. Obama is committed to retooling bankruptcy law as a giveaway to bankruptcy lawyers and judges, who will have a whole new category of litigation that once conceived, will be very hard to undo. It will also force banks to eat the costs of court-mandated mortgage cram downs, which in turn will—of course—be passed on the taxpayers, the true lender of last resort.

    This new process will further forestall foreclosures that once would have been inevitable by market forces, which in turn—along with Mr. Obama’s mortgage $75 billion refinancing plan and $200 billion of purchasing GSE Fannie and Freddie mortgage-backed securities—will make it harder for “troubled” assets to be valued. This in turn will perpetuate the current market contraction and spook investors already weary of market interventionism by government that has lasted almost a year now. The Geithner-inspired Bear Stearns bailout occurred March 16th, 2008. And now, some $10 trillion later in bailouts, new financial obligations, and subsidies, the Obama Administration is ready to once again prevent the market correction from occurring as Wall Street winces.

    Although touted as a “financial stability plan” Mr. Obama’s $2.8 trillion plan only further destabilizes an already distressed economy. It is also increases tensions amongst the can-do’s and have-not’s—those 90-plus percent who are paying their bills versus those very few who cannot afford their homes. The President will have an increasingly hard time convincing those who have played by the rules and are still paying for the entirety of their mortgages that it is their responsibility to pay for the irresponsible.

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