NEW DIRECTION FOR ENERGY INDEPENDENCE, NATIONAL SECURITY, AND CONSUMER PROTECTION ACT AND THE RENEWABLE ENERGY AND ENERGY CONSERVATION TAX ACT OF 2007 -- (Senate - April 03, 2008)
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Mr. GRASSLEY. Madam President, I rise for two purposes. One, to state some views on the Durbin amendment and, No. 2, to give very short remarks on tax provisions that are part of the underlying housing bill. I would like to speak on the Durbin amendment for the reason that I am the author of the bankruptcy reform provisions that passed here, maybe 3 or 4 years ago, and are now law. I would like to speak on the tax provisions as ranking Republican on the Senate Finance Committee.
Senator Durbin and I have had opportunities to work together on many issues, and in fact we are working together on other things this very day, unrelated to this bill. I appreciate the opportunities to cooperate in a bipartisan way with Senator Durbin. Senator Durbin, many months ago, was very polite, coming to me and asking me to take a look at his bankruptcy language. It is probably similar to the one that is before us right now. I know the language has been changed some since then, but it is basically the same concept. He asked me to consider it.
I and my staff did consider it, and I am standing here now to speak against it. But Senator Durbin was very courteous in giving me a heads up, not just a few weeks ago but a long time ago. I want my colleagues to know Senator Durbin is an easy Senator to work with, even if you disagree with him.
So I am here to voice opposition to Senator Durbin's bankruptcy amendment. While I appreciate Senator Durbin's sincerity in trying to alleviate the home mortgage crisis, I believe his amendment is misguided and will have serious unintended consequences. So I am going to point out some of my concerns.
First, the proposal would make filing bankruptcy a deceptively attractive option for people trying to keep their homes. But we do not want to encourage people to go into bankruptcy for the sole reason of keeping their homes. Rather, we should be working on solutions outside of bankruptcy to address this issue, and that is what a great part of the other provisions of this housing legislation before us is all about. That is what a lot of the things the Federal Reserve and the Secretary of the Treasury are trying to do, both through public policy as well as through encouraging private sector policy.
Other solutions need to be sought before bankruptcy. In order to get the relief Senator Durbin wants, homeowners will have to go into bankruptcy to get it. That is no news. He has made that very clear. I believe otherwise; that voluntary efforts and programs outside of bankruptcy will be quicker and more efficient, in terms of helping people keep their homes and shoring up the housing market. We need to let these efforts work.
Also, people will not risk ruining their credit history by filing for bankruptcy just because they think that this is the only way maybe they are going to be able to keep their home. The mortgage banking industry needs to be doing all it can to make sure that all homeowners in distress, not just the ones in bankruptcy, are getting help in making their payments.
I think more importantly, we have been told the cramdown provision in Senator Durbin's amendment will increase the cost of mortgages for all borrowers in the form of higher interest rates or higher downpayments, or both. Independent experts, as well as the Congressional Budget Office--and I like quoting the Congressional Budget Office because they are not partisan--have concluded that there will be an interest rate increase for all home mortgages, between 1 and 2 percent. Higher interest rates will deny many Americans the ability to buy a home and will make it more expensive for other Americans to get a home loan. So, in effect, this will put up barriers--maybe unintended barriers, but real barriers, the experts tell us--to the American dream of owning a home.
The fact is, in 1978, a Democratic-controlled Congress and a Democratic President specifically--and I wish to emphasize ``specifically''--exempted primary residences from cramdown to keep interest rates low for primary homes and to ensure credit was available for low-income borrowers. In fact, U.S. Supreme Court Justice Stevens explained, in the Nobleman case, that the legislative history of the 1978 bankruptcy law indicated very clearly that:
. . . favorable treatment of residential mortgages was intended to encourage the flow of capital into the home lending market.
Debate surrounding the Senate version of the 1978 act indicates that exceptions for real estate liens were allowed with the explicit goal of making home mortgages more available and more affordable than other kinds of credit. So I think, from the history of the 1978 act, there is a sound policy basis for this decision to not allow cramdown for primary homes in bankruptcy.
Mr. DURBIN. Will the Senator yield for a question?
Mr. GRASSLEY. Yes.
Mr. DURBIN. I would like to ask the Senator--I don't question what he has said, but after that, in the 1980s, we created a new chapter in bankruptcy, Chapter 12.
Mr. GRASSLEY. Now you are getting personal.
Mr. DURBIN. That is why I wish to make this point. Because we said that when it came to the so-called cramdown or modification of mortgages, we would make an exception and the exception would apply to the homes of farmers and their farm property. We said if they go into bankruptcy, they can have the mortgage on their farm home crammed down or modified.
At the time, the banking industry said this is a terrible decision because we are going to have to raise interest rates on farms. You are going to regret this. We did it anyway, and there was no significant increase in interest rates.
I would like to ask, through the Chair, whether the Senator from the great agricultural State of Iowa objects to cramming down mortgages on farm homes under Chapter 12.
Mr. GRASSLEY. Madam President, I am glad to answer that. First, let me explain why I said he is getting personal. I am the author of that Chapter 12 bankruptcy provision. I am going to address it very soon. So if you would listen, I think I will answer your questions. I appreciate what you are saying and, in fact, I anticipated that, and I hope I am ready for it. I am sure it is going to be difficult to satisfy the Senator from Illinois, though.
The amendment of Senator Durbin will not only increase interest rates on mortgages and make home ownership more expensive for everyone, many experts tell us this proposal will also have an adverse impact on financial markets because of difficulties and uncertainty in valuing the mortgages that back up securities. In addition, innocent investors would be hurt. So the Durbin amendment would cause other adverse impacts beyond higher costs of home loans.
Proponents of this amendment, particularly the cramdown provisions, argue that primary residences should be crammed down in bankruptcy just as second homes, family farms, and boats are. But there are good reasons why primary homes are treated differently from these other things.
First, interest rates and downpayments for vacation homes are significantly higher than for primary homes. If we are to start treating primary homes the same as vacation homes, I am told that then interest rates are certain to rise to the same level of second homes where cramdown is permitted.
Second, Chapter 12, referred to by the Senator from Illinois, only applies to very small commercial farming and ranching operations, not all farms and not all ranches. There are very specific requirements that need to be met in order to be able to file under Chapter 12. So we are not talking about the same number of loans that could be eligible under the Durbin amendment. I would be glad to give some statistics on that, but I am going to wait and see if the Senator from Illinois is satisfied.
Actually, I will give these numbers now because I think they are significant at this point. According to the USCOURTS.GOV Web site, the Federal courts Government Web site, for fiscal year 2006 there were only 348 Chapter 12 filings; in fiscal year 2007, there were only 361 Chapter 12 filings. This would compare to what, at least I believe, you are saying are possibly at least 600,000 filings under your amendment.
Moreover, it took Congress over two decades to make Chapter 12 a permanent part of the Bankruptcy Code because people were concerned about the possible negative consequences to allowing cramdown for family farms. Chapter 12 was initially only enacted as a temporary provision.
In addition, I would like to say that the definition of family farm which can file under Chapter 12 is very limited. In fact, Chapter 12 only applies to a limited number of farms--those that have less than $3.2 million in debt; debt has to arise out of the farming operation; 50 percent of income within the last 3 years has to come from farming income; and 80 percent of the assets in the estate have to be related to farming operations. Those are some of the requirements.
So probably Chapter 12 ended up, quite frankly, being a lot more narrow than maybe I originally intended. But I think it is working.
Finally, I want to go to the cramdown that is allowed for boats, because boats are like cars: their values diminish rather than increase, which is very different from real estate, where values are expected to rise over the long term.
Proponents of Senator Durbin's amendment argue that the way the amendment is now drafted, only a very limited number of loans will qualify for cramdown in bankruptcy. Now, while the amendment does attempt to limit the scope of the legislation from how it was originally drafted when Senator Durbin introduced his bankruptcy proposal as a stand-alone bill--that was probably soon after he had talked to me about it several months ago--the reality is that the language still is extremely broad. Cramdown and other loan modifications are available for many loans, both nontraditional and subprime as defined by Senator Durbin's amendment, made before the amendment's effective date. That is, of course, a lot of loans. Since there is no sunset date in the amendment, borrowers could file for bankruptcy and still get this cramdown relief years and years from now.
Mr. DURBIN. Would the Senator yield for a question?
Mr. GRASSLEY. Yes.
Mr. DURBIN. I ask the Senator, through the Chair, if he is aware of the fact that this only applies to mortgages, subprime mortgages on a primary residence that had been entered into as of the date of the enactment of legislation, not to any future mortgages of any kind?
Mr. GRASSLEY. So then you are saying my statement was wrong?
Mr. DURBIN. I am saying your statement should be modified.
Mr. GRASSLEY. I am looking at my staff because I am not a lawyer. My staff would disagree with you that my statement is inaccurate. But I will not go into that now.
Furthermore, according to the Durbin amendment, subprime loans are defined to be any loan with an interest rate of 3 to 5 percent over the Treasury yield rates for comparable loans. It is my understanding that this definition could include prime loans and home equity lines of credit, which would encompass a large number of loans.
The cramdown provision is just one of several problematic provisions in Senator Durbin's amendment. The amendment will increase bankruptcy filings, something I really do not think we should encourage. We should be doing everything we can to keep people out of bankruptcy. It ought to be very much a last resort, particularly because filing bankruptcy in and of itself hurts a consumer's credit rating. I think we can all agree that bankruptcy should be a last resort and one should not file for bankruptcy unless it is absolutely necessary. The amendment will increase mortgage interest rates and downpayments for other homeowners and potential home buyers. The Durbin bankruptcy amendment will inject greater risk into and negatively impact our financial markets.
I would like to be clear: I want to help homeowners weather the storm just as much as the next Senator. I want to support constructive solutions to help homeowners meet their obligations so they do not lose their homes. In fact, I have worked very hard with other Senators to craft tax provisions that I am soon going to address that are currently contained in the underlying housing proposal before us. But I am concerned that the Durbin bankruptcy amendment we are considering right now--if we adopt that, we are going to pass legislation that would do a great deal of harm. I am concerned about the possibility of the amendment helping some, but hurting many others. I am not alone in my concerns. Many experts agree that the Durbin bankruptcy cramdown proposal is problematic and could have serious adverse consequences. So I am asking my colleagues to vote against the Durbin bankruptcy amendment.
I said that I am the ranking Republican on the Senate Finance Committee. I now wish to give a short statement about some of the tax provisions. I may have to be more specific when we get into debate on this, so this is kind of a preliminary notice of where the committee is coming from. First of all, as usual, I find it very necessary to thank Chairman Baucus for his courtesy and hard work in the legislative effort. Our goal was to develop a bipartisan tax package that responds to the needs of Americans and, in particular, the housing market.
Americans are struggling to keep their homes and their jobs. As economic conditions continue to worsen, it is appropriate that Congress act to enact tax laws that address the housing problem. After all, the housing problem is at the root of the current economic turmoil and anxiety that people have.
Last year, we responded to the call for help. Congress enacted the Mortgage Debt Relief Act of 2007 which was signed into law by the President. This law excludes from income discharges of indebtedness incurred by taxpayers to acquire homes. It also extends the tax deduction for mortgage insurance premiums.
Earlier this year, Congress acted at lightning speed to enact a stimulus package that delivers additional relief to American taxpayers. As a result of that legislation, Treasury will be sending out rebate checks in a few weeks that will give the economy a much needed boost.
We have carefully balanced this tax relief package being considered today on the floor. It addresses the housing downturn but is limited so as to ensure that it helps the problem and does not simply create new problems. We are mindful that any relief that benefits one sector of the public does not do so at the expense of another sector. The other sector is the taxpaying population that carefully managed their family budget, especially as it is related to housing costs. Taxpayers bear the burden of a bailout of these risky mortgages that went south. So it is important that we have a compassionate view that recognizes taxpayers possibly picking up some of the tab.
Once again, the Senate is stepping in to help Americans in distress. The tax relief package helps encourage home ownership and encourages the basic businesses that are tied to the housing industry to recover some losses. Keep in mind that those businesses create jobs. More jobs means a stronger economy.
In 2002, Congress passed a stimulus bill that provided some of the very same relief that is contained in this bill. In 2002, Congress passed, with overwhelming support, a provision to extend the net operating loss carryback. This provision passed without controversy. Hopefully, there will be no controversy this time. Then, again, earlier this year the Senate Finance Committee passed a similar provision to extend the net operating loss carryback once again, with overwhelming support by the committee.
Relying on our successes in the past, we have included similar provisions in this bill. However, the net operating loss provision in this bill is even more conservative than the relief offered in the past. Instead of a 5-year carryback, this proposal offers a 4-year carryback. This provision, of course, is a no-brainer. It helps the very industries suffering from this housing downturn and will help Americans continue to be employed.
This bill also offers a tax credit to help people buy homes that are in foreclosure. These homes are depressing home values in the marketplace. It is important that this inventory is moved so as to help retain home values.
This bill also increases the cap on mortgage revenue bonds to give people in distressed loans additional options for refinancing. This is not a bailout for homeowners; this is a provision that helps enable people to keep their homes and to pay mortgages.
As we proceed on this bill, I am asking everybody to keep in mind what I said at the beginning: We need to address the housing downturn, but we need to show restraint. We need to limit the relief so that it eases the problem, but does not create new ones. We need to be considerate of the many Americans who worked hard to save and buy homes and who will ultimately pay the price for this relief, if the relief is used, and we expect it will be. They should benefit, too, in that any targeted relief will, in fact, give the economy a boost and not be a drag on the economy, drag it down even further. We want to keep people employed, and particularly the taxpayers who were conservative in their financial plans should not be harmed as a result of this.
I yield the floor.
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