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Mr. KINGSTON. I thank the gentleman for yielding.
I certainly applaud the committee for trying to do something about this problem, but I'm afraid that this is not the right solution. It actually seeks to help a few at the cost of all homeowners.
First of all, the government seems to be very content these days picking winners and losers. But I don't understand if Mr. Bachus is paying his mortgage and I'm not, why am I necessarily, just because of that, deserving to renegotiate the contract? What is it that the Federal bankruptcy judge will know about me which will make me have the insider advantage over my friend from Alabama? It doesn't make sense. The judge will have to decide, well, was I laid off because of something that I did? Did I bite off more than I should have chosen, because of my irresponsibility, because of the lender's irresponsibility? I think the precedent of this is extremely scary. And why only contracts that involve real estate? What about other contracts that people get involved with in terms of debt?
The fact of this is it's going to also not just put the government in a position of picking winners and losers, but it's going to put more uncertainty in the market. And right now, as I talk to Realtors and bankers and investors, what this market needs on Main Street and Wall Street is knowledge of rules. Rules that govern, regulatory practices, whatever they are, if they're here or if they're here, what Wall Street and the investment community needs to know is what are the rules? We will adjust to them. But here we go one more time increasing uncertainty by changing the rules.
Mr. Chair, the Helping Families Save Their Homes Act (H.R. 1106) would allow bankruptcy judges to reduce the principal owed on a mortgage, a practice often referred to as a ``cramdown.'' Judges would also be able to reduce interest rates or lengthen the term of the mortgage. This will help only a few people while raising the cost of borrowing for thousands of moderate-income and first-time homebuyers.
Although supporters claim that this is a limited provision that applies only to existing mortgages, the cramdown language can easily be amended to make it permanent at a later date--which would then be priced into future mortgages. In addition, the House bill lacks many of the targeted limitations designed to make sure that bankruptcy is a last resort. It even weakens language passed earlier by the House Judiciary Committee that was designed to keep those who filed fraudulent mortgage applications from taking advantage of cramdowns.
H.R. 1106 does contain two important provisions to correct flaws in the housing bailout plan passed last year.
Problems with Cramdowns: Allowing bankruptcy judges to modify mortgages would raise mortgage costs for everyone and even more for first time homebuyers. Cramdowns would add additional risk that mortgages will not be repaid as the contract requires. Lenders must charge for that added risk, and experts estimate that the additional costs would raise mortgage rates by as much as two full percentage points or substantially increase required down payments. This increase would apply to every mortgage applicant in order to ensure that the entire pool of mortgages remains profitable upon resale to the secondary market.
Mortgage companies would greatly expand ``risk based pricing'' of individual mortgages as well. These added costs would fall hardest on moderate-income and first-time homebuyers, who have a higher risk of defaulting on a mortgage. This will price many families out of the housing market.
Further undermine the value of mortgage-backed securities: Banks and other investors are already facing heavy losses not only because mortgage-backed securities have lost much of their value but because of uncertainties about whether the mortgages will be paid. The language in H.R. 1106 increases this uncertainty. Investors will be at risk of both foreclosure and cramdowns that reduce the earnings of these securities. Many cramdown mortgages will later go into foreclosure. Since investors have no idea what this new provision will do to the value of their securities, prices will drop further.
Fail to help many homeowners: Only one-third of all Chapter 13 fliers completes the process successfully and gets the fresh start that bankruptcy promises. The other two-thirds ``pay court fees, pay attorney's fees, pay fees to the bankruptcy trustee, invest time and money to restructure their financial affairs, and then wind up with nothing more than temporary relief. In fact, one third of chapter 13 filers go on to file for bankruptcy again.
Other Provisions in H.R. 1102: The Helping Families Save Their Homes Act also contains a mixture of other housing and financial provisions. These include:
Liability waivers for mortgage servicers that modify mortgages: Mortgage servicers receive payments from mortgages and forward them (after fees) to the owners of the mortgages. As the main contact with homeowners, mortgage servicers should be able to refinance or alter mortgages in order to ensure that the owners get the best possible return, but many fear that unhappy mortgage owners would sue them. The legislation provides these servicers with a safe harbor so long as they act within certain specified boundaries. This is a needed change.
Making $250,000 FDIC and MCUA deposit insurance levels permanent: Last fall, Congress increased deposit insurance coverage by FDIC and NCUA to $250,000 until December 2009. This bill makes that change permanent and also increases the agencies' borrowing authority to cover their losses. Borrowing authority is used only if the deposit insurance fund runs out. This is a useful change but unlikely to be needed.
Keeping predatory lenders from taking advantage of FHA programs: Section 203 of H.R. 1106 makes it easier for HUD and the FHA to prevent predatory lenders from underwriting FHA-guaranteed home loans. This is a needed reform.
Trying to fix the Hope for Homeowners program: Last summer, Congress created Hope for Homeowners, an FHA-based program that it originally. FHA claimed the program which is run jointly with Treasury, would help up to 2 million homeowners. To date, according to the FHA, it has actually helped about 500. The legislation makes a number of changes that will make it more attractive to homeowners, raise the cost of it by $2.3 billion, but is unlikely to otherwise improve it.
Making the Problem Worse: Mortgage cramdowns would further destabilize an already damaged housing market while increasing mortgage costs for future borrowers. The useful changes it makes are necessary but in no way overcome the downsides associated with the passage of this legislation.
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