Banking Law

Bankruptcy cram-down legislation for residential mortgages is back on the front burner. When we last looked at this proposal, its chances of enactment looked favorable, but it was stripped out of the legislation to which it had been appended prior to passage. However, as Luke Mullin notes, the post-election world is a whole new era for Democrats eager to make the evil banking business pay for its sins, and, at the same time, to help consumers who can't pay their home loans today prove that they won't be able to pay a stripped down mortgage a few months or years hence. That way, everybody loses, but politicians make it appear that they've actually accomplished something of long-term benefit.  That's the American way, no?

Given the makeup of the US House and Senate, and with Barack Obama in the White House, I don't think that the "tough fight" by the lending business that Luke correctly forecasts will ultimately prove successful this time around. The argument that banks have made repeatedly to thwart such legislation is that the reason that cram-down for residential first-lien mortgages was omitted from the Bankruptcy Reform Act of 1978 was that it would make residential mortgage lending more expensive for homeowners and would restrict the access to credit for millions of potential homeowners. I think that a large portion of the American public is at a point where it thinks that making residential mortgages tougher to obtain for millions of homeowners is not such a bad idea. Loose underwriting (in addition to outright criminal behavior and borederline-lunatic risk taking on Wall Street) played a huge role in creating the current crisis. If factoring in the risk of a cram-down in bankruptcy increases the cost of residential mortgage credit in the same way that it's increased the cost of commercial mortgage credit, "so be it," say most of the the non-bankers with whom I discuss the issue.

In addition, the drumbeat continues to "stop the tsunami of foreclosures." Letting the market sort itself out with respect to borrowers lacks popular appeal  (regardless of its logical force with free market advocates), since the current "conservative" administration decided to intervene to save lenders and securitizers. Rather than the thus-far slow and inefficient process of having loan servicers sort through the loan modification morass at a pace that has pleased no one, foreclosure opponents might prefer that a bankruptcy court not only stop the foreclosure, but re-write the loan while it's at it. Of course, the borrower will have to file bankruptcy first, which will screw up his or her credit for years to come, but that's a trade-off many may be willing to make to keep their homes. Again, if this makes residential lending tougher in the future, that's the price of "fairness" and besides, this is America: we live solely for today.

At least, that's the line today. When cramdowns, and other restrictions on first lien residential mortgage lending, have been enacted by the next Congress, and their full effect is felt, I have no doubt that many of these same folks will be moaning about how hard it is to qulaify, and afford, a home loan. I also have no doubt that among those moaners will be Bill Delahunt and Dick Durbin.