“Helping Families Save Their Homes Act”?
- Or Neighborhood Destabilization Act: Allows bankruptcy judges to reduce the principal owed on a mortgage, a practice often referred to as a “cramdown.” Judges would be able to reduce interest rates or lengthen the term of the mortgage.
- H.R. 1106: It actually achieves opposite results by putting millions of homeowners or potential buyers at greater risk of an unstable credit and housing market and creating high interest rates in the future.
- Temporary? No. Weak? Yes: The simple rule on Capitol Hill when a bill is controversial is claim it is temporary and expand it later. That is the case here. Additionally, the bill lacks many of the targeted limitations designed to make sure that bankruptcy is a last resort and even weakens language passed earlier by the House Judiciary Committee that was designed to keep those who filed fraudulent mortgage applications from taking advantage of cramdowns.
Destabilizing Results
- Higher Mortgage Rates: Cramdowns add additional risk that mortgages will not be repaid as the contract requires. Lenders must charge for that added risk, and experts estimate that the additional costs would raise mortgage rates by as much as two full percentage points or substantially increase required down payments.
- When in Doubt, Go Bankrupt: As homeowners struggle with homes that have lost value in this economic downturn, the easiest option available will be to declare bankruptcy, whereby they can renegotiate not only their payments but the actual value of their homes.
- Destabilizes Credit Market: Banks and investors are already facing heavy losses because mortgage-backed securities have lost much of their value due to uncertainties about whether the mortgages will be paid. This measure increases that uncertainty, risking both foreclosure and cramdowns that reduce the earnings of these securities. Investors have no idea what this new provision will do to the value of their securities, dropping prices further.
No Hope for Homeowners
- Good Money After Bad, Again: In addition to the cramdown measures, H.R. 1106 expands the Hope for Homeowners program. Last summer, Congress created Hope for Homeowners, an FHA-based program that it originally claimed would help up to 2 million homeowners. According to the FHA, it has actually helped about 500. The legislation makes a number of changes that will raise the cost of it by $2.3 billion but is unlikely to otherwise improve it.
- Responsible Taxpayers Lose, Again: The expansion in this bill would further erode taxpayer protections by allowing even more extremely troubled loans to be accepted to the Hope for Homeowners program. H.R. 1106 would expand this program to include even more unstable mortgages, all to allow people who are in homes they can’t afford to stay in them.
Unfair at Any Cost
- Robbing the Responsible Homeowner: Congress cannot enact a policy that imposes major, unexpected losses on home lenders without raising the cost of and reducing access to home loans, period. This policy penalizes responsible homebuyers and future homebuyers in order to provide immediate bailouts to the irresponsible and keep them in homes they cannot and will not afford. Taxpayers who saved for a responsible down payment, bought a house they could afford, and made their payments will pay for the mistakes of others.