Mr. Chairman, this country is in a serious economic downturn, a downturn that is worsened by the foreclosure crisis. Until we address the foreclosure crisis it will be difficult for the economy to recover.
Nearly three million homeowners are more than sixty days late on their mortgage payments and in danger of losing their homes.
I’m sure these bleak numbers and a sincere desire to get the economy back on track animate the proponents of mortgage bankruptcy legislation.
However, this bankruptcy bill not only will fail to solve the foreclosure crisis, but also will make the foreclosure crisis deeper, longer and wider.
The result of this legislation will be to increase the overall cost of lending. This, in turn, will require borrowers to pay higher interest rates and other upfront costs when they borrow in the future. So, the costs of allowing mortgage modification will be borne by future homeowners.
This legislation will also encourage borrowers to file for bankruptcy. Borrowers’ ability to cram-down mortgage principal with the knowledge that if they sell their home in the future they will capture any appreciation will provide a strong incentive to file for bankruptcy.
There is no guarantee that bankruptcy courts will even be able to handle the flood of bankruptcy claims that will occur should this bill be adopted. There are only 368 bankruptcy judges. If bankruptcy filings double or triple as a result of this legislation, as is predicted, it is unclear that the courts could handle the increased case load in a quick or effective manner. This will prolong the crisis as borrowers wait for their bankruptcy plan to be approved.
We have better alternatives available to us to enable borrowers and lenders to work together to modify unaffordable mortgages. Although many loan modification efforts have not worked, many others are working and more can be done.
Several proposals have been made to address the problems that are preventing loan officers from providing workable loan modifications—proposals that will cost the taxpayers far less than the costs this bankruptcy bill will impose.
The majority has attempted to narrow its bill with a manager’s amendment. Unfortunately, that amendment will do little to address the problems this bill presents.
One section of the manager’s amendment actually points out the problematic nature of this legislation. Section 8 of the amendment adds a rule of construction intended to shield FHA, VA and Rural Housing Service loans from modification in bankruptcy. This raises the following question: if the bill is too costly and damaging to be applied to government loan programs, why isn’t it too costly and damaging to be applied to private-sector loans?
A bankruptcy solution, in my judgment, would need to be limited to subprime and non-traditional mortgages.
It would need to provide bankruptcy courts clear guidance on the procedure to follow in modifying the terms of home mortgages—guidance that would make lowering payments to an affordable level the paramount goal of bankruptcy modification.
It would also need to provide much stricter provisions for allowing a lender to recapture any principal that is reduced in bankruptcy if the home is later sold at a profit.
Because the manager’s amendment does not go far enough in narrowing the scope of this bill, I have to urge my colleagues to vote against passage of this legislation.