Yesterday, Nancy Pelosi announced that a housing bill which could come up for a vote this week would include the "cram-down" provision, which would allow bankruptcy judges to modify the terms of mortgages for borrowers on their primary residence (currently judges have the ability to do this on secondary residences). This is an important provision, which most economists believe will be the best tool homeowners can have for them to stay in their homes, and for lenders to agree to loan modifications. The banksters hate this idea, mainly because they know it would blow the whistle on their consistent violations of the spirit and the letter of the Truth In Lending Law, in their mania to lock as many people into mortgages as possible without regard for ability to pay, so they could sell those mortgages on as securities, and so on and so forth. This ultimately is the fault of the lender, who are clearly the irresponsible ones in the whole scenario.
Along with my friends at Brave New Films, I talked to Rep. John Conyers, the chair of the House Judiciary Committee and the author of HR 200, the cram-down bill, about this provision and why it's needed at this time.
We know that the housing bubble bursting was a major, if not the major, cause of the current financial crisis. And we have as many as 10 million homeowners at risk in the near future for foreclosure, or for being underwater on their homes as prices crash. With securitization slicing and dicing mortgages into tiny parts and selling them all over the world, it's nearly impossible for homeowners to bargain with their lender - it's hard for them to know who even owns the property. And while it costs lenders to have a home revert back to them in foreclosure, both on the defaulted mortgage and on continued upkeep of the house until resale, there are perverse incentives for them not to enter agreements with homeowners that will allow them to stay in their homes. Barack Obama's plan seeks to incentivize in the other direction to get loans modified, but only cram-down will really bring the lenders to the table. As Rep. Conyers says, this "levels the playing field" and gives homeowners a tool to bargain with the lenders. Currently they have none. While Obama's plan holds open the option for cram-down, and he has been supportive of the change in bankruptcy law, we really need legislation to define this specifically.
Mind you, practically every other asset that anyone who goes into bankruptcy has - second and third homes, yachts, cars, you name it - is eligible for a rewriting of terms by the bankruptcy judge. It's only the primary residence that is excluded. This is perverse and seeks to only benefit the wealthy. Far from encouraging bankruptcy among the poor, this bill would encourage the bankers to help them avoid it. As Conyers said:
The very people that prevented the bankruptcy judge from having this power in the first place are the ones now that are most seriously resisting us giving it to them, even while we're in a national crisis. You know, it's amazing how greed and self-interest makes people forget about the fact that we're in a recession that could get much worse. It could be a depression. And by the way, this helps not just the poor borrower who may be locked up or laid off or their job has moved away or anything may have happened, but what we're doing now is that we're saying the judge has the authority to help everybody. You know, the more houses that are put into foreclosure, the more run-down the neighborhoods become, and also the more property of everybody is involved. This provision is to keep you from going into bankruptcy.
This is a classic political argument, as Mike Lux argues, between those "rugged individualists" who think everybody should be out for themselves (except when their investment firms and giant insurance companies are about to go under), and those who think we are linked and we have a responsibility to our brothers and sisters, as surely as they do to us. Forcing everybody off a foreclosure cliff makes no sense to either those newly homeless or the property owners who will see their values plummet. And contra the Santelli revolution, the public basically gets this.