Banking Law

Depending on which side of the political spectrum you inhabit, last week's destruction of Senator Dick Durbin's amendment to allow bankruptcy judges to cram down the value of residential real estate loans to the fair market value of the collateral securing the loan was either a dastardly deed or the second coming of The Great Emancipator. Lefty Los Angeles Times sang the blues, disguised, as usual, as an unbiased news story.

The financial services industry is in trouble over its role in crashing the world economy, but that doesn't mean its lobbyists have lost all their muscle on Capitol Hill.



Exhibit A: The Senate delivered a stinging rebuff to President Obama and consumer advocates Thursday by rejecting a measure to help homeowners facing foreclosure.

Yeah, those damned lobbyists and other "special interests" derailed the will of the people with their ungodly use of logic. Curses! Foiled again!

Its defeat in the Senate marked a turnaround for the Democratic supporters of the bill, who had hoped that the party's new majority would boost its chances for passage.



Instead, Democratic leaders were furious to see bankers lobbying against consumer protection measures after Congress had approved enormous sums to shore up the financial services industry.



"I am sick and tired of being asked to give billions to these banks," said Senate Democratic Whip Dick Durbin (D-Ill.), who threatened to oppose any further industry bailouts. "If they have no sympathy for homeowners facing foreclosure, I don't have any sympathy for them."



Travis Plunkett, legislative director of the Consumer Federation of America, attributed bankers' continuing clout to the fact that they are major financial players in campaign contributions -- to Democrats as well as Republicans.



According to the Center for Responsive Politics, commercial bank employees donated $22.5 million to congressional candidates -- more than half of it to Democrats.

Legislators influenced by political contributions? What next: the sun rises in the east tomorrow morning? Is there no end to mankind's and nature's perversity?

"There's no question that our industry has lost a substantial part of its credibility and its reputation in the eyes of legislators and regulators," David G. Kittle, chairman of the [Mortgage Banker's A]ssociation, said in [a] video.



Indeed, a recent Gallup Poll found that only 5% of respondents expressed a "great deal" of confidence in U.S. banks -- the lowest since the poll started asking the question in 1979.

Indeed. Once again, a main stream media drone can't understand the distinction between a mortgage lender, represented by the MBA, and a commercial bank, represented by the ABA. The Gallup poll isn't directed to the same industry group that MBA chairman Kittle was addressing. In addition, the Gallup poll was directed to members of the great mass of the unwashed, bootless, and unhorsed, not the "legislators and regulators" to whom Mr. Kittle was referring. Let's not details get in the way of a good story, though.

The home loan measure, sponsored by Durbin, would allow judges to reduce, or "cram down," the principal owed on an existing mortgage for a primary residence. It would remove an oddity in current bankruptcy law:



Judges handling bankruptcy cases can already reduce the principal -- and thus the size of the payments -- on a vacation home, car or boat, but not on a mortgage for a primary residence. The bill would have changed that. Sponsors hoped that would give banks an incentive to modify loans to give relief to borrowers facing foreclosure.

An "oddity"? Hardly. It is a deliberate decision by the US Congress to keep the cost of residential purchase and refinance financing affordable and to promote housing. While Congress might reconsider that incentive, and a healthy debate over the issue is not something to be avoided, a mischaracterization of the lack of a cram down right for first lien residential mortgages as an "oddity" that Durbin's amendment was designed to remove is either a graphic display of ignorance or bias by reporter Janet Hook. No where in her article is any mention of the major argument made by opponents of the amendment, that a cram down right would increase the cost of first residential mortgage loans. You can also legitimately debate the validity of that argument, but to completely omit it from the article makes Ms. Hook a shill for the bill's supporters.

On the other side of the fence, the capitalist oppressor mouthpieces of The Wall Street Journal, while correctly pointing out that it was an alliance of community bankers and credit unions that were especially influential in their criticism of the cram down amendment (in opposition to their sell-out Big Brothers at Citigroup and Bank of America), no where in the article is mentioned the bitter criticism of the defeat by consumer groups or Democratic supporters nor the influence of nefarious lobbyists. You might as well have been watching Sean Hannity on Fox. On the other hand, at least The WSJ saved its outright crowing for the editorial page.

The cramdown would have allowed bankruptcy judges to rewrite contracts to reduce the amount that people owe on their mortgages. But a bipartisan majority understood that relief for today's troubled borrowers would be paid with higher rates on the next generation of homeowners, as lenders priced the added risk into mortgage contracts.

A dozen Democrats joined Republicans in the 51-45 vote, and even Pennsylvania turncoat Arlen Specter gave his former GOP comrades an assist. Speaking for millions of renters and nondelinquent borrowers, Mr. McConnell said that the vote "ensures that homeowners who pay their bills and follow the rules won't see an interest-rate hike at the whim of a bankruptcy judge."

[...]

The victory is also an example of Republicans helping the economy and thus saving Democrats from their own worst instincts. Liberals were so intent on helping troubled homeowners that they were willing to punish the profits of the very banks they say they want to lend more to new mortgage borrowers. May we have more such virtuous "obstructionism."

It may be a victory for now at least, but there's always next week, next month, next year.

"No man's life, liberty, or property are safe while the legislature is in session." Gideon J. Tucker, 1866.