Just as the housing market is showing definite signs that it is stabilizing after a lengthy drop in housing prices, the House of Representatives is about to vote on proposal that would destabilize it once again while also raising the cost of mortgages for future home buyers.
The proposal – to be offered by Rep. John Conyers (D-MI) as an amendment to the financial regulation bill now before the House -would allow bankruptcy judges to reduce the principal owed on a mortgage, a practice often referred to as a “cramdown.” Judges would also be able to reduce interest rates or lengthen the term of the mortgage.
This is a huge policy mistake that would help only a few people while raising the cost of borrowing for thousands of moderate-income and first-time homebuyers. As we warned back in February, and expanded upon in April, when the Senate debated and ultimately defeated similar language that limited cramdowns to specific situations:
…no matter how strict those limits seem, they do not alter the fundamental problems caused by mortgage cramdowns. Even with these limits, this proposal would still increase the cost of homeownership and especially hurt both first-time homebuyers and families with low to moderate incomes. It would also deal a blow to banks and other lenders at a time when many are faltering. Worst of all, allowing bankruptcy judges to rewrite mortgages would prevent few foreclosures while imposing high costs on many who tried this approach.
Mortgage cramdowns were bad policy in both February and April. They are still bad policy, and would end up hurting the very people that supporters claim to want to help.