CQ reports that the Senate is debating “a contentious bankruptcy amendment” to the broad housing bill now under consideration. The amendment sponsored by Sen. Dick Durbin (D-IL) would empower federal judges to unilaterally and arbitrarily re-write mortgage contracts. The Heritage Foundation’s David John identified five reasons why this is disastrous policy for the country:

  • This bill would add the government as a silent third party to all private contracts between a homebuyer and a lender. Until now, the government has rightly stayed out of these transactions. The bill would create an incentive for mortgage seekers to agree to any terms, confident that a bankruptcy court will bail them out at a later date.
  • Such a move builds in a greater chance that the mortgage contract will not be paid as agreed. In order to protect their shareholders, financial institutions must price that uncertainty and add it to the cost of a mortgage.
  • It will be much harder for low-income homebuyers or new homebuyers to find mortgages. Because of the even higher risk that courts may restructure loans to those groups, lenders will focus on upper-income borrowers or those with high downpayments and good credit histories.
  • If the bills are enacted, this premium is likely to be higher until the industry has enough experience to more accurately price the added uncertainty.
  • Even if they can get loans, low-income workers, first-time borrowers, and those with impaired credit histories will pay much higher interest rates since they have the highest probability of running into financial trouble.