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The Cram-down Showdown

By Robert Romano

The showdown in Congress over a controversial bill modifying bankruptcy law, H.R. 1106, may ultimately be a test of the public's support for the President's overall bailout package, already totaling over $2 trillion planned by the Administration.

To be certain, the American people are already weary from the over $8 trillion in bailout commitments, appropriations, loans from overseas, loans to troubled financial institutions, insurance companies, and automakers, and doubling the monetary base.

Now, this week, and as early as tomorrow, Congress will be voting on President Barack Obama's proposal to give bankruptcy judges the arbitrary authority to reduce mortgages: principals, interest rates, and otherwise the tinkering with the terms of the loans. In the end, this is a transparent handout to the bankruptcy bar—who will undoubtedly get more business, and more federal appointments, as a direct result.

That is because currently, there are only some 368 bankruptcy judges nationwide. However, in 2008, there were some 2.3 million foreclosures, and one of the effects of the proposed law will be to give troubled homeowners a bankruptcy option to keep their homes from being foreclosed upon.

The law would apply to existing homeowners, practically guaranteeing that the courts will be overwhelmed by a significant increase in caseloads.

ALG President Bill Wilson noted in a letter to Congress last week that H.R. 1106 will “take negotiations over troubled mortgages out of the hands of lenders, reduce incentives for investors to back mortgages, and clog up bankruptcy courts. It will force banks to eat the costs of the cram-downs, who in turn will have to tap more of the taxpayer-funded TARP to recoup losses. It will therefore increase the dependency of mortgage lenders on government aid.” In other words, instead of stabilizing the housing market, the President's proposal will only make it worse.

Also, under current law, bankruptcy filers are required to undergo credit counseling prior to going forward with the process. H.R. 1106 repeals the counseling, which may have the effect of filers not being presented with alternatives to bankruptcy, thereby increasing bankruptcy filings only further. This will have the further impact of clogging the courts.

To make matters worse, the Administration foresees as many as 6 million upcoming foreclosures. In 2008, Congress spent some $300 billion for foreclosure “prevention” without much of an effect, with over 2 million taking place anyway. Mr. Obama's latest scheme is therefore an ill-conceived, Canutian effort in futility to order the tide back.

Overall, the cram-down proposal is ostensibly a bankruptcy bar handout, but its impact, as noted above, is more far-reaching. It will increase taxpayer liability for paying off the worst mortgages that would otherwise be foreclosed upon, and that may ultimately be foreclosed upon anyway.

It will also further distort markets from being able to properly price mortgage-backed securities, one of the major problems that to date has not been solved despite Congress dedicating some $700 billion to purchasing “troubled” assets last year.

This showdown over bankruptcy cram-downs will seriously test the public's support of yet more bailout proposals. It may ultimately determine whether America permanently becomes a bailout nation. And a debtor nation, for that matter.

Robert Romano is the Editor of ALG News Bureau.


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