Politicians Worth Their Salaries: Giannoulias
Why I Support Cram-Down Reform.
As a former community banker, I know that there are many good, conscientious lenders who will do whatever they can to make sure families are not kicked out of their homes and onto the street. Good bankers understand that foreclosures don’t help our banks or communities thrive, and they don’t help keep the American dream alive. And frankly, it doesn’t help their bottom line.
Banks renegotiate the terms of mortgages outside of court to give homeowners a second chance all the time. But since the subprime mess, many banks haven’t been as kind. That’s why I supported this amendment; it only applied to lenders that failed to do the right thing by not offering loan modifications outside of court in the first place.
But the power players in the financial industry disagreed, and they certainly didn’t want to cede control of their business decisions to bankruptcy courts. They claimed the amendment would lead to more bankruptcy filings and prompt more homeowners to use bankruptcy as a threat to negotiate lower monthly payments, which would force lenders to raise interest rates.
Those arguments fall short. Homeowners do not want to risk long-term damage to their credit rating. Housing advocates dispute the higher interest rate claim and estimate the amendment would save hundreds of thousands of homeowners from facing foreclosure. In my experience, fewer foreclosures mean fewer bankruptcies.
But the Senate caved to powerful banking lobbyists when it gutted the amendment. And, to make matters even more frustrating, those lobbyists were paid for with money from the same banks that have received billions of dollars in subsidies from taxpayers in order to escape a financial firestorm of their making.
Senator Durbin said it best about banks: “they frankly own the place.”
The debate over the bill and its ultimate failure demonstrate why we need to reduce the influence of corporate interests and their role in shaping policy.
Cramdown makes sense for the vast majority of financial institutions. Foreclosure is expensive and in the short term there are housing gluts in the areas hit hardest by the mortgage finance crisis. This makes it even hard to sell the properties that are foreclosed upon. Those fighting cramdown legislation are largely institutions that aren’t banks and invested in securitized mortgages and/or made lots of subprime loans.
There are different kinds of borrowers facing problems. Speculators won’t be helped much by this sort of bill. They are essentially screwed with a market that evens out or drops.
However, homeowners who bought into bad loan agreements can benefit greatly. If you look at the Eddy Curry article (not a typical example–just the terms) his variable rate mortgage could go from somewhere around 3 percent to 15 percent. A millionaire pro-athlete isn’t a problem but a family that bought into a cheap monthly payment and didn’t understand the potential for escalating payments does. Or a family that might have bought in with a steady two incomes when one has now gone away.
Cramdown still delivers a fair rate of return to the financial insitution and decreases the risk of default to go along with that so that there is compensation for the change in terms. It keeps people in their homes if there is a reasonable chance for a family to afford the new payments, and it reduces the housing glut in those cities where one exists.
The resistance is there because it will affect the value of those securitized mortgage packages out there and create more accounting problems for some institutions who are staying afloat by largely overvaluing assetts. That’s probably necessary in the short run, but can also be solved with emergency accounting rules.