The Cram-down Showdown By Robert Romano The showdown in Congress over a controversial bill modifying bankruptcy law, H.R. 1106, may ultimately be a test of the public's support for the President's overall bailout package, already totaling over $2 trillion planned by the Administration. To be certain, the American people are already weary from the over
By Robert Romano
The showdown in Congress over a controversial bill
modifying bankruptcy law, H.R. 1106, may ultimately be a test of the public's
support for the President's overall bailout package, already totaling over $2
trillion planned by the Administration.
To be certain, the American people are already
weary from the over $8 trillion in bailout commitments, appropriations, loans
from overseas, loans to troubled financial institutions, insurance companies,
and automakers, and doubling the monetary base.
Now, this week, and as early as tomorrow, Congress
will be voting on President Barack Obama's proposal to give bankruptcy judges
the arbitrary authority to reduce mortgages: principals, interest rates, and
otherwise the tinkering with the terms of the loans. In the end, this is a
transparent handout to the bankruptcy bar—who will undoubtedly get more
business, and more federal appointments, as a direct result.
That is because currently, there are only some 368
bankruptcy judges nationwide. However, in 2008, there were some 2.3 million
foreclosures, and one of the effects of the proposed law will be to give
troubled homeowners a bankruptcy option to keep their homes from being
The law would apply to existing homeowners,
practically guaranteeing that the courts will be overwhelmed by a significant
increase in caseloads.
ALG President Bill Wilson noted in a letter to
Congress last week that H.R. 1106 will “take negotiations over troubled
mortgages out of the hands of lenders, reduce incentives for investors to back
mortgages, and clog up bankruptcy courts. It will force banks to eat the costs
of the cram-downs, who in turn will have to tap more of the taxpayer-funded TARP
to recoup losses. It will therefore increase the dependency of mortgage lenders
on government aid.” In other words, instead of stabilizing the housing market,
the President's proposal will only make it worse.
Also, under current law, bankruptcy filers are
required to undergo credit counseling prior to going forward with the process.
H.R. 1106 repeals the counseling, which may have the effect of filers not being
presented with alternatives to bankruptcy, thereby increasing bankruptcy filings
only further. This will have the further impact of clogging the courts.
To make matters worse, the Administration foresees
as many as 6 million upcoming foreclosures. In 2008, Congress spent some $300
billion for foreclosure “prevention” without much of an effect, with over 2
million taking place anyway. Mr. Obama's latest scheme is therefore an
ill-conceived, Canutian effort in futility to order the tide back.
Overall, the cram-down proposal is ostensibly a
bankruptcy bar handout, but its impact, as noted above, is more far-reaching. It
will increase taxpayer liability for paying off the worst mortgages that would
otherwise be foreclosed upon, and that may ultimately be foreclosed upon
It will also further distort markets from being
able to properly price mortgage-backed securities, one of the major problems
that to date has not been solved despite Congress dedicating some $700 billion
to purchasing “troubled” assets last year.
This showdown over bankruptcy cram-downs will
seriously test the public's support of yet more bailout proposals. It may
ultimately determine whether America permanently becomes a bailout nation. And a
debtor nation, for that matter.
Robert Romano is the Editor of ALG News